------~-~-o [S ~ ~ ~] 111
i l 2013 I~ IN THE WEST VIRGINIA SUPREME COURT OF APP
st ~8middotJ RORY L PERRYIl CLd SUPi-EME COURT OF APPEALS
OF WEST VIRG~r-JIA
AT CHARLESTON
INRE THE MARRIAGE OF
KIMBERLEY A MORRIS
Respondent Below
Petitioner
vs No 13-0742
DOUGLAS SHANE MORRIS
~Petitioner Below
Respondent
PETITIONERS BRIEF
JAMES WILSON DOUGLAS WV State Bar No 1050 145 Main Street Post Office Box 425 Sutton West Virginia 26601 Counsel for Petitioner 304-765-2821 j 1852earthlnet August 30 2013
TABLE OF CONTENTS
Table ofAuthorities iii
Assigmnents ofError 1
1 ERROR ONE FAILURE TO EMPLOY A STRICTER STANDARD FOR WEIGHING THE VALIDITY AND ENFORCEABILTY OF A POST-NUPTIAL AGREEMENT IN A DIVORCE ACTION AS OPPOSED TO A PRE-NUPTIAL AGREEMENT 1
2 ERROR TWO OVERTURNING THE FAMILY COURTS RULING FINDING THAT THE FEBRUARY 112009
POST-NUPTIAL AGREEMENT WAS NOT FAIR AND EQUITABLE 2
3 ERROR THREE DETERMINING THAT RETAINED EARNINGS ARE THE ASSETS OF A FLOW THROUGH CORPORATION RATHER THAN DISTRIBUTABLE MARITAL ASSETS SIMILAR TO ACTIVE APPRECIATION OF A SEPARATE BUSINESS WAS ERRONEOUS 3
Statement of the Case 3
Summary ofArgument 11
Statement Regarding Oral Argument and Decision 12
Argument and Standards ofReview 13
I IN A DIVORCE ACTION A STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITY AND ENFORCEABILTY OF A POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT 13
ll A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOT ATTACH DOCUMENTATION CONFIRMING THE EXTENT AND VALUES OF PROPERTY (C) DID NOT INCLUDE ALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME 15
1
III RETAINED EARNINGS IN A FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOT ASSETS OF THE CORPORATION 22
Conclusion 33
Appendix Al
11
TABLE OF AUTHORITIES
West Virginia Case Law
Carr v Hancock
216 WVa 474 607 SE2d 803 (2004) 16
Lee v Lee
228 WVa 483721 SE2d 53 (WVa 2011) 13
Loudermilk v Loudermilk
183 WVa 616397 SE2d 905 (1990) 23
Mayhew v Mayhew (Mayhew 1)
197 WVa 290475 SE2d 382 (1996) 17
Mayhew v Mayhew (Mayhew II)
205 WVa 490 519 SE2d 188 (1999)
Miller v Miller
189 WVa 126428 SE2d 547 (1993)
Perdue v Coiner
156 WVa 467 194 SE2d 657 (1973)
Protan v Ghannam
17
17
15
2011 LEXIS 121 (Memorandum Decision 2011) 16
Rosen v Rosen
222 WVa 402 664 SE2d 743 (2008) 16
Smith v Smith
197 WVa 505475 SE2d 881 (1996) footnote 11 26
Stephen LH v Sherry LH
195 WVa 384465 SE2d 841 (1995) 15
Teedv Teed
No 12-0232 (WVa filed May 172013) (Memorandum Decision) 22
iii
Welsh v Welsh
136 WVa 914 69 SE2d 34 (1952) 14
West Virginia Statutes
West Virginia Code sect48-1-233 23
West Virginia Code sect48-7-102 1220
West Virginia Code sect48-7-104 33
West Virginia Code sect48-8-103 10
Connecticut Case Law
Bedrick v Bedrick
300 Conn 691 696-697 17 A3d 1723 (2011) 15
Delaware Case Law
Ramon v Ramon
963 A2d 128 (Del 2008) 2730
Florida Case Law
Casto v Casto
508 So2d 330 334 (Fla 1987) 142021
Illinois Case Law
In re Marriage ofLundahl
919 NE2d 480 (Ill App 2009) 27
In re Marriage ofJoynt
375 Ill App 3d 817874 NE2d 916 (Ill App 2007) 27
Iowa Case Law
In Fe Casten
819 NW2d 426 (Iowa App 2012) 28
IV
Kansas Case Law
In re Marriage ofTraster
291 P3d 494 (Kan App 2012) 14
Massachusetts Case Law
Ansin v Craven-Ansin
457 Mass 283 289 929 NE2d 955 962 (2010) 14
Missouri Case Law
Heineman v Heineman
768 SW2d 130 (Mo App WD 1989) 28
New Jersey Case Law
Pacelli v Pacelli
319 NJ Super 185 190-196 725 A2d 56 (1999) 15
Ohio Case Law
Zaccardelli v Zaccardelli
2013 Ohio 1878 (Ohio App No 26262 2013) 282930
Other
American Law Institute Principles of the Law of Marital
Dissolution sect701(1)(b)(2002) 13
Blacks Law Dictionary (Abridged 5th Edition 1990) 25
Restatement (Second) of Contracts sect71 13
Rule 5(g) WVRRAP 1
Rule 18(a)(4) WVRRAP 12
Rule 20(a) WVRRAP 12
v
IN THE WEST VIRGINIA SUPREME COURT OF APPEALS
AT CHARLESTON
INRE THE MARRIAGE OF
KIMBERLEY A MORRIS Respondent Below
Petitioner
vs No 13-0742
DOUGLAS SHANE MORRIS Petitioner Below
Respondent
PETITIONERS BRIEF
Comes now the Petitioner KIMBERLEY A MORRIS Respondent
below (hereafter Petitioner Wife) by her counsel James Wilson Douglas pursuant to Rule 5(g)
ofthe Revised Rules ofAppellate Procedure of the West Virginia Supreme Court ofAppeals
and in and for her Brief for timely appeal oftpe Order below does aver depose and say as
follows
ASSIGNMENTS OF ERROR
1 ERROR ONE FAILURE TO EMPLOY A STRICTER STANDARD FOR WEIGIDNG THE VALIDITY AND ENFORCEABILTY OF A POST -NUPTIAL AGREEMENT IN A DIVORCE ACTION AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court erred below by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
When dealing with post-nuptial contracts the utmost fairness and good faith
should be observed by the party who gains the most from the transaction In the case of a preshy
nuptial a party can refuse to consummate the anticipated marriage This is wholly different in the
case where the party to the post-nuptial agreement is already in the marriage and may have a
number of other considerations such as children standard of living etc Therefore coercion undue
influence and duress though less obvious and more subtle can be just as effective and overbearing
as the actual use of force in causing a party to enter into a post-nuptial contract
Standards of review Abuse of discretion clearly erroneous and de novo
2 ERROR TWO OVERTURNING THE FAMILY COURTS RULING FINDING THAT THE FEBRUARY 11 2009 POST -NUPTIAL AGREEMENT WAS NOT FAIR AND EQUITABLE
The Circuit Court erred below by upholding a post-nuptial drafted by the Respondent Husbands Attorney that (a) consigned a disproportionate percentage omarital assets to the Respondent Husband (b) did not attach documentation confirming the extent and values ofproperty (c) did not include all marital assets and (d) severely understated the anticipated annual income othe Respondent Husband who received the larger share ofmarital assets
Under the Post-Nuptial Agreement sub judice the Respondent Husband would
receive $466273800 worth of alleged separatemarital property while the Petitioner Wife would
receive a mere $9000000 worth ofalleged separate property In short the total marital estate of shy
$475273800 would give the Respondent Husband 9811 of the entire marital estate while the
Petitioner Wife would be left with only 189 of said marital estate
In addition to not includihg all arguably marital or separate assets the Respondent
Husband attached no documentation to the subject Post-Nuptial Agreement to substantiate the
fmancial and asset statements appended thereto as exhibits
Also the Respondent Husband grossly under-reported his anticipated income by
75 when indexed against his actual income for the year (2009) of the execution of said Post-
Nuptial Agreement and by over 8804 when compared to the preceding year of2008
2
Standards of review Abuse of discretion and clearly erroneous
3 ERROR THREE DETERMINING THAT RETAINED EARNINGS ARE THE ASSETS OF A FLOW THROUGH CORPORATIONRATHER THAN DISTRIBUTABLE MARITAL ASSETS SIMILAR TO ACTIVE APPRECIATION OF A SEPARATE BUSINESS WAS ERRONEOUS
The Circuit Court below erred as a matter oflaw when it overruled the Family Court and classified retained earnings ofa flow through corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Respondent Husband and Wife hadpaid income taxes on the retained earnings both before and after the Post-Nuptial Agreement
Retained earnings are not true assets of a corporation such as a corporate purchase
ofan automobile in its name Said monies upon which the Parties were already taxed herein
actually represent undistributed dividends or after tax income that can be considered reshy
contributions ofthe Parties to the capital ofthe corporation Simply put the corporate earnings
are taxed to the Parties but some of the Parties after tax earnings are left in the corporation to
insure adequate capitalization as if the monies had been withdrawn and then redeposited Retained
eafmngs can also be explained as the measure of active appreciation of a corporation
The tax driven structure of the subject Corporation was at separation of the
shareholding Parties herein a qualified sub-chapter S or a flow through corporation This
means that the profits l of the Corporation flow through to the shareholders as if they were
partners in that the only taxes on those profitsincome are those paid by the shareholders not the
Corporation
Standard of review De novo
STATEMENT OF THE CASE
1 Retained earnings are but residue ofprofits kept or retained in a corporation
3
Having met at Glenville State College the Parties hereto entered into marriage on
June 30 1992 and had two children one ofeach gender both ofwhom are now emancipated2bull The
Respondent Husband herein Douglas Shane Morris was the scion of the Glenville oil and gas
tycoon 1 L Morris and in hope of the Respondent Husband ascending to his fathers station at
some point in the future he became a part owner in the family petroleum business called Waco Oil
and Gas Inc
The Fates decreed otherwise When the Respondent Husbands father became
disenchanted with the Respondent Husbands hedonistic and irresponsible life style the Respondent
Husband was terminated and his interest in Waco was purchased by his disappointed parent
Thereafter the Parties hereto with two young children in tow relocated to Roanoke Virginia
where they purchased with the Parties Waco buy-out monies in 2002 anopulent fifteen room
multilevel 6700 square feet mansion which was to be the familyS residence through mid 2005
when they returned to Gilmer County from Virginia The mechanics and motivations for the 2005
return3 were and are especially relevant to the principal issues raised in this case
Due to the Respondent Husbands substance abuse he and the Petitioner had
separated in Virginia about mid-December 2004 In an effort to reconcile and to raise their
children in an intact home the Respondent Husband promised the Petitioner that if she would
reunite with him and come back to Glenville he would build a comparable (to the Roanoke) home
in Gilmer County The Petitioner relented and agreed to reconcile on those terms The Parties did
indeed return to Gilmer County and at first lived in Wacos airport hanger and then the Parties
3The following factual representations are summarized from the July 112012 in-Court testimony of the Petitioner
4
purchased what the Petitioner thought was to be a temporary dwelling in the form of a double wide
modular home
For the next three plus years or into the beginning of2009 the Petitioner and her
two (2) children much to her frustration and embarrassment occupied a domicile that the Petitioner
stated would have fit within the bottom floor ofher former 6700 square feet Roanoke home
The Respondent Husband made various excuses for his failure to fulfill his earlier
promise regarding the erection of a much grander residence and the Petitioners desperation and
irritation with her and the childrens living arrangements brought matters to the point that the
Parties briefly separated for a second time in early 2009 After another reconciliation the
Respondent Husband finally revealed that his procrastination in building the promised home for his
family was that he had to have the fmancial assistance ofhis multimillionaire father to build such a
house and that his father was insisting on a post-nuptial agreement to protect what was anticipated
to be a $75000000 investment
Bowles Rice LLP the corporate attorneys employed by the Respondent Husbands
father were engaged to and did draft the post-nuptial agreement The Wife had the services of a
local Glenville attorney4 Timothy Butcher who was a friend to both Parties herein
Petitioner Wife had alleged and argued from the onset of the underlying action that
said PNA which as stated was prepared at the insistence of the Respondent Husbands father I L
Morris and drafted by corpora~e counsel of the Respondent Husbands father was entered into by
the Petitioner Wife under duress coercion and undue influence
4There is some lingering question whether the Petitioner Wifes counsel was independent where her attorney testified at the July 112012 hearing that he was paid for his representation of the Petitioner Wife by the Respondent Husbands paving his the lawyers residential driveway or by some other in-kind compensation from the Respondent Husband
5
Indeed Petitioners counsel Timothy Butcher testified on the record at the July 11
2012 trial that the Respondent Husband and his fathers attorney definitely held [the PNA-house
connection] over the Petitioner Wifes head in that the Petitioner Wifes attorney was clearly and
directly informed by counsel for the Respondent Husband that if she the Petitioner did not sign the
Post-Nuptial Agreement then the Respondent Husband would not complete construction on the
then pending and now former marital home ie no signature no house 5 See also Appendix p
31
Moreover the Petitioner Wifes attorney advised her not to sign the PNA but out
of an overriding desire to have an acceptable house built for her and her children consistent with her
and the childrens prior standard ofliving the Petitioner Wife signed anyway6 See Appendix p
32 After some negotiation on some minor points (but receiving no corroboration of
listedproperty values- Appendix p 32) and at that time after near~y seventeen (17) years of a
tenuous if not difficult marriage and two (2) children the Parties subscribed to the February 11
2009 Post-Nuptial Agreement (hereafter PNA) See Appendix ppl through 19
Said PNA which was also entered into more than seventeen (17) years after the
February 6 1992 formation ofFlying W Plastics Inc (hereafter Flying W) the ownership
interests ofwhich were representedjor thefirst time on appeal to the Circuit Court below or after
the trial before the Family Court Judge to have been given by the Respondent Husbands wealthy
father to the Respondent Husband and his lawyer sister Shelly Morris Demarino during the
marriage The Respondent Husband and his sister were and are the only shareholders of the closely
SIn-court testimony of attorney Timothy Butcher on July 11 2012 which was corroborated on the same date by the testimony of the Petitioner
6Ibid
6
held corporation which elected to become a Subchapter S or flow through corporation effective
July 120077
The evidence was unrefuted at trial and even confirmed by the Respondent
Husband himself by his own sworn testimony in open Court that he had exercised an active and a
high level of administrative participation on a daily basis in Flying W
Inspecting the document itself the terms of the PNA under scrutiny basically
consigned said Subchapter S Corporation (Flying W) and other marital assets constituting 9811
ofthe marital estate unto the Respondent Husband while the Petitioner Wife took only 189 of
such assets In addition said PNA contained only summary statements of finances by the Parties
ie no full financial disclosure was made due to an absence ofany supporting documentation
attached to the PNA Appendix pp 15 through 18
Also the Respondent Husband greatly understated his projected income for the
PNA year of2009 The Respondent Husband reported on the PNA that his estimated annual
income for 2009 would be $231000 Appendix p 16 In actuality the Parties adjusted gross
income for 2009 was $889862 or almost four (4) times more than the Respondent Husband led the
Wife to believe In comparison to 2008 the year prior to the PNA the Parties earned $1931914
which income as well as the aforesaid 2009 earnings were the products solely of the Respondent
Husbands efforts because the Petitioner Wife did not work during that year of2008 or the
following year of 2009 Compare Appendix p 16 with pp 154 and 158
Ofequal significance the PNA failed to include all marital or arguable marital
assets Several working interests in oil and gas wells across central West Virginia as well as the
7The 2011 gross receipts of Flying W were $4077339400 and $2855606100 in 2010 See Appendix pp 174 and 173 respectively which were Petitioners Exhibits at trial on December 262012
7
very double wide modular home the Petitioner Wife was seeking to leave were not listed in the
PNA attachments
Furthermore the retained earnings8 held by the aforesaid Corporation under the
Parties named account was not mentioned in the PNA Petitioner Wife maintained that even if
the PNA were valid and enforceable the retained earnings were not corporate assets and thus
distributable because the Parties had paid taxes on said earnings before and after the execution of
the PNA The Petitioner Wife also contended that even ifthe PNA were upheld as to the
Corporation those post PNA retained earnings had been commingled with other corporate assets
and monies thus causing a transmutation of the Flying W Corporation or at least its financial
accounts into marital assets
Lastly in the PNA the new house for which the Petitioner Wife gave up so much
was to be lived in by he Petitioner Wife rent free in the event ofa divorce with the Respondent
Husband servicing the mortgage until the Parties sold the marital residence at which time the
Petitioner Wife would receive all proceeds in excess of the mortgage payoff provided however the
Respondent Husband had the right offIrst refusal See Appendix p 8 As something ofamiddot
postscript the Petitioner Wife also testifIed at trial on July 11 2012 that the Respondent Hus1gtand
had failed to honor her whole consideration for signing off on the PNA viz the promised marital
house was never fInished which position the Respondent Husband minimized by saying that only
minor facets of the construction such as landscaping and closet doors remained undone
In essence the Petitioner Wife contended that the terms of said February 11 2009
Post-Nuptial Agreement were unfair and unconscionable to her and that despite having had access
8Retained earnings carried by Flying W in the name ofthe Respondent Husband and his sister for December 2011 were $1185363113 and $1434330786 as of the end ofDecember 2012 See Appendix pp 180 and 181
8
to legal advice coercion in the form ofdenying her and her children the upscale home for which she
had left a stately domicile in Virginia four (4) years past was present and overwhelmed what would
have otherwise been an unacceptable trade offin the context of the PNA Secondarily the
Petitioner Wife posited that even if the PNA were upheld the retained earnings of Flying W in
not being mentioned in the PNA were marital assets upon which the Parties had paid taxes and
thus the same were distributable in the pending divorce action
The Respondent Husband countered that the Petitioner Wife a college graduate
had voluntarily and knowingly entered into the PNA in disregard of the advice of counsel and that
his the Respondent Husbands undocumented financial disclosure was of no serious moment
Regarding the omission of retained earnings in the PNA the Respondent Husband urged that the
same were corporate and not marital assets and the retained earnings were therefore included in the
PNAs release ofFlying W to him
Both Parties agreed that the validity and enforceability of the PNA should first be
determined because the of the impact the Family Courts decision would have on the remaining
issues of the divorce proper Trial on the viability of the PNA commenced on June 22 2012 and
the taking of evidence continued and concluded on July 112012
At the close of the July 11 2012 hearing the Family Court Judge found that the
PNA should be upheld primarily because the Petitioner Wife had freely voluntarily and knowingly
entered into the February 112009 PNA without force or threat however the retained earnings of
Flying W were deemed to be marital assets subject to distribution Appendix p 34
The Final Hearing in the divorce was scheduled for December 26 2012 for the
purpose ofconcluding the case and determining the amount ofthe retained earnings on the January
9
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
TABLE OF CONTENTS
Table ofAuthorities iii
Assigmnents ofError 1
1 ERROR ONE FAILURE TO EMPLOY A STRICTER STANDARD FOR WEIGHING THE VALIDITY AND ENFORCEABILTY OF A POST-NUPTIAL AGREEMENT IN A DIVORCE ACTION AS OPPOSED TO A PRE-NUPTIAL AGREEMENT 1
2 ERROR TWO OVERTURNING THE FAMILY COURTS RULING FINDING THAT THE FEBRUARY 112009
POST-NUPTIAL AGREEMENT WAS NOT FAIR AND EQUITABLE 2
3 ERROR THREE DETERMINING THAT RETAINED EARNINGS ARE THE ASSETS OF A FLOW THROUGH CORPORATION RATHER THAN DISTRIBUTABLE MARITAL ASSETS SIMILAR TO ACTIVE APPRECIATION OF A SEPARATE BUSINESS WAS ERRONEOUS 3
Statement of the Case 3
Summary ofArgument 11
Statement Regarding Oral Argument and Decision 12
Argument and Standards ofReview 13
I IN A DIVORCE ACTION A STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITY AND ENFORCEABILTY OF A POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT 13
ll A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOT ATTACH DOCUMENTATION CONFIRMING THE EXTENT AND VALUES OF PROPERTY (C) DID NOT INCLUDE ALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME 15
1
III RETAINED EARNINGS IN A FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOT ASSETS OF THE CORPORATION 22
Conclusion 33
Appendix Al
11
TABLE OF AUTHORITIES
West Virginia Case Law
Carr v Hancock
216 WVa 474 607 SE2d 803 (2004) 16
Lee v Lee
228 WVa 483721 SE2d 53 (WVa 2011) 13
Loudermilk v Loudermilk
183 WVa 616397 SE2d 905 (1990) 23
Mayhew v Mayhew (Mayhew 1)
197 WVa 290475 SE2d 382 (1996) 17
Mayhew v Mayhew (Mayhew II)
205 WVa 490 519 SE2d 188 (1999)
Miller v Miller
189 WVa 126428 SE2d 547 (1993)
Perdue v Coiner
156 WVa 467 194 SE2d 657 (1973)
Protan v Ghannam
17
17
15
2011 LEXIS 121 (Memorandum Decision 2011) 16
Rosen v Rosen
222 WVa 402 664 SE2d 743 (2008) 16
Smith v Smith
197 WVa 505475 SE2d 881 (1996) footnote 11 26
Stephen LH v Sherry LH
195 WVa 384465 SE2d 841 (1995) 15
Teedv Teed
No 12-0232 (WVa filed May 172013) (Memorandum Decision) 22
iii
Welsh v Welsh
136 WVa 914 69 SE2d 34 (1952) 14
West Virginia Statutes
West Virginia Code sect48-1-233 23
West Virginia Code sect48-7-102 1220
West Virginia Code sect48-7-104 33
West Virginia Code sect48-8-103 10
Connecticut Case Law
Bedrick v Bedrick
300 Conn 691 696-697 17 A3d 1723 (2011) 15
Delaware Case Law
Ramon v Ramon
963 A2d 128 (Del 2008) 2730
Florida Case Law
Casto v Casto
508 So2d 330 334 (Fla 1987) 142021
Illinois Case Law
In re Marriage ofLundahl
919 NE2d 480 (Ill App 2009) 27
In re Marriage ofJoynt
375 Ill App 3d 817874 NE2d 916 (Ill App 2007) 27
Iowa Case Law
In Fe Casten
819 NW2d 426 (Iowa App 2012) 28
IV
Kansas Case Law
In re Marriage ofTraster
291 P3d 494 (Kan App 2012) 14
Massachusetts Case Law
Ansin v Craven-Ansin
457 Mass 283 289 929 NE2d 955 962 (2010) 14
Missouri Case Law
Heineman v Heineman
768 SW2d 130 (Mo App WD 1989) 28
New Jersey Case Law
Pacelli v Pacelli
319 NJ Super 185 190-196 725 A2d 56 (1999) 15
Ohio Case Law
Zaccardelli v Zaccardelli
2013 Ohio 1878 (Ohio App No 26262 2013) 282930
Other
American Law Institute Principles of the Law of Marital
Dissolution sect701(1)(b)(2002) 13
Blacks Law Dictionary (Abridged 5th Edition 1990) 25
Restatement (Second) of Contracts sect71 13
Rule 5(g) WVRRAP 1
Rule 18(a)(4) WVRRAP 12
Rule 20(a) WVRRAP 12
v
IN THE WEST VIRGINIA SUPREME COURT OF APPEALS
AT CHARLESTON
INRE THE MARRIAGE OF
KIMBERLEY A MORRIS Respondent Below
Petitioner
vs No 13-0742
DOUGLAS SHANE MORRIS Petitioner Below
Respondent
PETITIONERS BRIEF
Comes now the Petitioner KIMBERLEY A MORRIS Respondent
below (hereafter Petitioner Wife) by her counsel James Wilson Douglas pursuant to Rule 5(g)
ofthe Revised Rules ofAppellate Procedure of the West Virginia Supreme Court ofAppeals
and in and for her Brief for timely appeal oftpe Order below does aver depose and say as
follows
ASSIGNMENTS OF ERROR
1 ERROR ONE FAILURE TO EMPLOY A STRICTER STANDARD FOR WEIGIDNG THE VALIDITY AND ENFORCEABILTY OF A POST -NUPTIAL AGREEMENT IN A DIVORCE ACTION AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court erred below by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
When dealing with post-nuptial contracts the utmost fairness and good faith
should be observed by the party who gains the most from the transaction In the case of a preshy
nuptial a party can refuse to consummate the anticipated marriage This is wholly different in the
case where the party to the post-nuptial agreement is already in the marriage and may have a
number of other considerations such as children standard of living etc Therefore coercion undue
influence and duress though less obvious and more subtle can be just as effective and overbearing
as the actual use of force in causing a party to enter into a post-nuptial contract
Standards of review Abuse of discretion clearly erroneous and de novo
2 ERROR TWO OVERTURNING THE FAMILY COURTS RULING FINDING THAT THE FEBRUARY 11 2009 POST -NUPTIAL AGREEMENT WAS NOT FAIR AND EQUITABLE
The Circuit Court erred below by upholding a post-nuptial drafted by the Respondent Husbands Attorney that (a) consigned a disproportionate percentage omarital assets to the Respondent Husband (b) did not attach documentation confirming the extent and values ofproperty (c) did not include all marital assets and (d) severely understated the anticipated annual income othe Respondent Husband who received the larger share ofmarital assets
Under the Post-Nuptial Agreement sub judice the Respondent Husband would
receive $466273800 worth of alleged separatemarital property while the Petitioner Wife would
receive a mere $9000000 worth ofalleged separate property In short the total marital estate of shy
$475273800 would give the Respondent Husband 9811 of the entire marital estate while the
Petitioner Wife would be left with only 189 of said marital estate
In addition to not includihg all arguably marital or separate assets the Respondent
Husband attached no documentation to the subject Post-Nuptial Agreement to substantiate the
fmancial and asset statements appended thereto as exhibits
Also the Respondent Husband grossly under-reported his anticipated income by
75 when indexed against his actual income for the year (2009) of the execution of said Post-
Nuptial Agreement and by over 8804 when compared to the preceding year of2008
2
Standards of review Abuse of discretion and clearly erroneous
3 ERROR THREE DETERMINING THAT RETAINED EARNINGS ARE THE ASSETS OF A FLOW THROUGH CORPORATIONRATHER THAN DISTRIBUTABLE MARITAL ASSETS SIMILAR TO ACTIVE APPRECIATION OF A SEPARATE BUSINESS WAS ERRONEOUS
The Circuit Court below erred as a matter oflaw when it overruled the Family Court and classified retained earnings ofa flow through corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Respondent Husband and Wife hadpaid income taxes on the retained earnings both before and after the Post-Nuptial Agreement
Retained earnings are not true assets of a corporation such as a corporate purchase
ofan automobile in its name Said monies upon which the Parties were already taxed herein
actually represent undistributed dividends or after tax income that can be considered reshy
contributions ofthe Parties to the capital ofthe corporation Simply put the corporate earnings
are taxed to the Parties but some of the Parties after tax earnings are left in the corporation to
insure adequate capitalization as if the monies had been withdrawn and then redeposited Retained
eafmngs can also be explained as the measure of active appreciation of a corporation
The tax driven structure of the subject Corporation was at separation of the
shareholding Parties herein a qualified sub-chapter S or a flow through corporation This
means that the profits l of the Corporation flow through to the shareholders as if they were
partners in that the only taxes on those profitsincome are those paid by the shareholders not the
Corporation
Standard of review De novo
STATEMENT OF THE CASE
1 Retained earnings are but residue ofprofits kept or retained in a corporation
3
Having met at Glenville State College the Parties hereto entered into marriage on
June 30 1992 and had two children one ofeach gender both ofwhom are now emancipated2bull The
Respondent Husband herein Douglas Shane Morris was the scion of the Glenville oil and gas
tycoon 1 L Morris and in hope of the Respondent Husband ascending to his fathers station at
some point in the future he became a part owner in the family petroleum business called Waco Oil
and Gas Inc
The Fates decreed otherwise When the Respondent Husbands father became
disenchanted with the Respondent Husbands hedonistic and irresponsible life style the Respondent
Husband was terminated and his interest in Waco was purchased by his disappointed parent
Thereafter the Parties hereto with two young children in tow relocated to Roanoke Virginia
where they purchased with the Parties Waco buy-out monies in 2002 anopulent fifteen room
multilevel 6700 square feet mansion which was to be the familyS residence through mid 2005
when they returned to Gilmer County from Virginia The mechanics and motivations for the 2005
return3 were and are especially relevant to the principal issues raised in this case
Due to the Respondent Husbands substance abuse he and the Petitioner had
separated in Virginia about mid-December 2004 In an effort to reconcile and to raise their
children in an intact home the Respondent Husband promised the Petitioner that if she would
reunite with him and come back to Glenville he would build a comparable (to the Roanoke) home
in Gilmer County The Petitioner relented and agreed to reconcile on those terms The Parties did
indeed return to Gilmer County and at first lived in Wacos airport hanger and then the Parties
3The following factual representations are summarized from the July 112012 in-Court testimony of the Petitioner
4
purchased what the Petitioner thought was to be a temporary dwelling in the form of a double wide
modular home
For the next three plus years or into the beginning of2009 the Petitioner and her
two (2) children much to her frustration and embarrassment occupied a domicile that the Petitioner
stated would have fit within the bottom floor ofher former 6700 square feet Roanoke home
The Respondent Husband made various excuses for his failure to fulfill his earlier
promise regarding the erection of a much grander residence and the Petitioners desperation and
irritation with her and the childrens living arrangements brought matters to the point that the
Parties briefly separated for a second time in early 2009 After another reconciliation the
Respondent Husband finally revealed that his procrastination in building the promised home for his
family was that he had to have the fmancial assistance ofhis multimillionaire father to build such a
house and that his father was insisting on a post-nuptial agreement to protect what was anticipated
to be a $75000000 investment
Bowles Rice LLP the corporate attorneys employed by the Respondent Husbands
father were engaged to and did draft the post-nuptial agreement The Wife had the services of a
local Glenville attorney4 Timothy Butcher who was a friend to both Parties herein
Petitioner Wife had alleged and argued from the onset of the underlying action that
said PNA which as stated was prepared at the insistence of the Respondent Husbands father I L
Morris and drafted by corpora~e counsel of the Respondent Husbands father was entered into by
the Petitioner Wife under duress coercion and undue influence
4There is some lingering question whether the Petitioner Wifes counsel was independent where her attorney testified at the July 112012 hearing that he was paid for his representation of the Petitioner Wife by the Respondent Husbands paving his the lawyers residential driveway or by some other in-kind compensation from the Respondent Husband
5
Indeed Petitioners counsel Timothy Butcher testified on the record at the July 11
2012 trial that the Respondent Husband and his fathers attorney definitely held [the PNA-house
connection] over the Petitioner Wifes head in that the Petitioner Wifes attorney was clearly and
directly informed by counsel for the Respondent Husband that if she the Petitioner did not sign the
Post-Nuptial Agreement then the Respondent Husband would not complete construction on the
then pending and now former marital home ie no signature no house 5 See also Appendix p
31
Moreover the Petitioner Wifes attorney advised her not to sign the PNA but out
of an overriding desire to have an acceptable house built for her and her children consistent with her
and the childrens prior standard ofliving the Petitioner Wife signed anyway6 See Appendix p
32 After some negotiation on some minor points (but receiving no corroboration of
listedproperty values- Appendix p 32) and at that time after near~y seventeen (17) years of a
tenuous if not difficult marriage and two (2) children the Parties subscribed to the February 11
2009 Post-Nuptial Agreement (hereafter PNA) See Appendix ppl through 19
Said PNA which was also entered into more than seventeen (17) years after the
February 6 1992 formation ofFlying W Plastics Inc (hereafter Flying W) the ownership
interests ofwhich were representedjor thefirst time on appeal to the Circuit Court below or after
the trial before the Family Court Judge to have been given by the Respondent Husbands wealthy
father to the Respondent Husband and his lawyer sister Shelly Morris Demarino during the
marriage The Respondent Husband and his sister were and are the only shareholders of the closely
SIn-court testimony of attorney Timothy Butcher on July 11 2012 which was corroborated on the same date by the testimony of the Petitioner
6Ibid
6
held corporation which elected to become a Subchapter S or flow through corporation effective
July 120077
The evidence was unrefuted at trial and even confirmed by the Respondent
Husband himself by his own sworn testimony in open Court that he had exercised an active and a
high level of administrative participation on a daily basis in Flying W
Inspecting the document itself the terms of the PNA under scrutiny basically
consigned said Subchapter S Corporation (Flying W) and other marital assets constituting 9811
ofthe marital estate unto the Respondent Husband while the Petitioner Wife took only 189 of
such assets In addition said PNA contained only summary statements of finances by the Parties
ie no full financial disclosure was made due to an absence ofany supporting documentation
attached to the PNA Appendix pp 15 through 18
Also the Respondent Husband greatly understated his projected income for the
PNA year of2009 The Respondent Husband reported on the PNA that his estimated annual
income for 2009 would be $231000 Appendix p 16 In actuality the Parties adjusted gross
income for 2009 was $889862 or almost four (4) times more than the Respondent Husband led the
Wife to believe In comparison to 2008 the year prior to the PNA the Parties earned $1931914
which income as well as the aforesaid 2009 earnings were the products solely of the Respondent
Husbands efforts because the Petitioner Wife did not work during that year of2008 or the
following year of 2009 Compare Appendix p 16 with pp 154 and 158
Ofequal significance the PNA failed to include all marital or arguable marital
assets Several working interests in oil and gas wells across central West Virginia as well as the
7The 2011 gross receipts of Flying W were $4077339400 and $2855606100 in 2010 See Appendix pp 174 and 173 respectively which were Petitioners Exhibits at trial on December 262012
7
very double wide modular home the Petitioner Wife was seeking to leave were not listed in the
PNA attachments
Furthermore the retained earnings8 held by the aforesaid Corporation under the
Parties named account was not mentioned in the PNA Petitioner Wife maintained that even if
the PNA were valid and enforceable the retained earnings were not corporate assets and thus
distributable because the Parties had paid taxes on said earnings before and after the execution of
the PNA The Petitioner Wife also contended that even ifthe PNA were upheld as to the
Corporation those post PNA retained earnings had been commingled with other corporate assets
and monies thus causing a transmutation of the Flying W Corporation or at least its financial
accounts into marital assets
Lastly in the PNA the new house for which the Petitioner Wife gave up so much
was to be lived in by he Petitioner Wife rent free in the event ofa divorce with the Respondent
Husband servicing the mortgage until the Parties sold the marital residence at which time the
Petitioner Wife would receive all proceeds in excess of the mortgage payoff provided however the
Respondent Husband had the right offIrst refusal See Appendix p 8 As something ofamiddot
postscript the Petitioner Wife also testifIed at trial on July 11 2012 that the Respondent Hus1gtand
had failed to honor her whole consideration for signing off on the PNA viz the promised marital
house was never fInished which position the Respondent Husband minimized by saying that only
minor facets of the construction such as landscaping and closet doors remained undone
In essence the Petitioner Wife contended that the terms of said February 11 2009
Post-Nuptial Agreement were unfair and unconscionable to her and that despite having had access
8Retained earnings carried by Flying W in the name ofthe Respondent Husband and his sister for December 2011 were $1185363113 and $1434330786 as of the end ofDecember 2012 See Appendix pp 180 and 181
8
to legal advice coercion in the form ofdenying her and her children the upscale home for which she
had left a stately domicile in Virginia four (4) years past was present and overwhelmed what would
have otherwise been an unacceptable trade offin the context of the PNA Secondarily the
Petitioner Wife posited that even if the PNA were upheld the retained earnings of Flying W in
not being mentioned in the PNA were marital assets upon which the Parties had paid taxes and
thus the same were distributable in the pending divorce action
The Respondent Husband countered that the Petitioner Wife a college graduate
had voluntarily and knowingly entered into the PNA in disregard of the advice of counsel and that
his the Respondent Husbands undocumented financial disclosure was of no serious moment
Regarding the omission of retained earnings in the PNA the Respondent Husband urged that the
same were corporate and not marital assets and the retained earnings were therefore included in the
PNAs release ofFlying W to him
Both Parties agreed that the validity and enforceability of the PNA should first be
determined because the of the impact the Family Courts decision would have on the remaining
issues of the divorce proper Trial on the viability of the PNA commenced on June 22 2012 and
the taking of evidence continued and concluded on July 112012
At the close of the July 11 2012 hearing the Family Court Judge found that the
PNA should be upheld primarily because the Petitioner Wife had freely voluntarily and knowingly
entered into the February 112009 PNA without force or threat however the retained earnings of
Flying W were deemed to be marital assets subject to distribution Appendix p 34
The Final Hearing in the divorce was scheduled for December 26 2012 for the
purpose ofconcluding the case and determining the amount ofthe retained earnings on the January
9
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
III RETAINED EARNINGS IN A FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOT ASSETS OF THE CORPORATION 22
Conclusion 33
Appendix Al
11
TABLE OF AUTHORITIES
West Virginia Case Law
Carr v Hancock
216 WVa 474 607 SE2d 803 (2004) 16
Lee v Lee
228 WVa 483721 SE2d 53 (WVa 2011) 13
Loudermilk v Loudermilk
183 WVa 616397 SE2d 905 (1990) 23
Mayhew v Mayhew (Mayhew 1)
197 WVa 290475 SE2d 382 (1996) 17
Mayhew v Mayhew (Mayhew II)
205 WVa 490 519 SE2d 188 (1999)
Miller v Miller
189 WVa 126428 SE2d 547 (1993)
Perdue v Coiner
156 WVa 467 194 SE2d 657 (1973)
Protan v Ghannam
17
17
15
2011 LEXIS 121 (Memorandum Decision 2011) 16
Rosen v Rosen
222 WVa 402 664 SE2d 743 (2008) 16
Smith v Smith
197 WVa 505475 SE2d 881 (1996) footnote 11 26
Stephen LH v Sherry LH
195 WVa 384465 SE2d 841 (1995) 15
Teedv Teed
No 12-0232 (WVa filed May 172013) (Memorandum Decision) 22
iii
Welsh v Welsh
136 WVa 914 69 SE2d 34 (1952) 14
West Virginia Statutes
West Virginia Code sect48-1-233 23
West Virginia Code sect48-7-102 1220
West Virginia Code sect48-7-104 33
West Virginia Code sect48-8-103 10
Connecticut Case Law
Bedrick v Bedrick
300 Conn 691 696-697 17 A3d 1723 (2011) 15
Delaware Case Law
Ramon v Ramon
963 A2d 128 (Del 2008) 2730
Florida Case Law
Casto v Casto
508 So2d 330 334 (Fla 1987) 142021
Illinois Case Law
In re Marriage ofLundahl
919 NE2d 480 (Ill App 2009) 27
In re Marriage ofJoynt
375 Ill App 3d 817874 NE2d 916 (Ill App 2007) 27
Iowa Case Law
In Fe Casten
819 NW2d 426 (Iowa App 2012) 28
IV
Kansas Case Law
In re Marriage ofTraster
291 P3d 494 (Kan App 2012) 14
Massachusetts Case Law
Ansin v Craven-Ansin
457 Mass 283 289 929 NE2d 955 962 (2010) 14
Missouri Case Law
Heineman v Heineman
768 SW2d 130 (Mo App WD 1989) 28
New Jersey Case Law
Pacelli v Pacelli
319 NJ Super 185 190-196 725 A2d 56 (1999) 15
Ohio Case Law
Zaccardelli v Zaccardelli
2013 Ohio 1878 (Ohio App No 26262 2013) 282930
Other
American Law Institute Principles of the Law of Marital
Dissolution sect701(1)(b)(2002) 13
Blacks Law Dictionary (Abridged 5th Edition 1990) 25
Restatement (Second) of Contracts sect71 13
Rule 5(g) WVRRAP 1
Rule 18(a)(4) WVRRAP 12
Rule 20(a) WVRRAP 12
v
IN THE WEST VIRGINIA SUPREME COURT OF APPEALS
AT CHARLESTON
INRE THE MARRIAGE OF
KIMBERLEY A MORRIS Respondent Below
Petitioner
vs No 13-0742
DOUGLAS SHANE MORRIS Petitioner Below
Respondent
PETITIONERS BRIEF
Comes now the Petitioner KIMBERLEY A MORRIS Respondent
below (hereafter Petitioner Wife) by her counsel James Wilson Douglas pursuant to Rule 5(g)
ofthe Revised Rules ofAppellate Procedure of the West Virginia Supreme Court ofAppeals
and in and for her Brief for timely appeal oftpe Order below does aver depose and say as
follows
ASSIGNMENTS OF ERROR
1 ERROR ONE FAILURE TO EMPLOY A STRICTER STANDARD FOR WEIGIDNG THE VALIDITY AND ENFORCEABILTY OF A POST -NUPTIAL AGREEMENT IN A DIVORCE ACTION AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court erred below by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
When dealing with post-nuptial contracts the utmost fairness and good faith
should be observed by the party who gains the most from the transaction In the case of a preshy
nuptial a party can refuse to consummate the anticipated marriage This is wholly different in the
case where the party to the post-nuptial agreement is already in the marriage and may have a
number of other considerations such as children standard of living etc Therefore coercion undue
influence and duress though less obvious and more subtle can be just as effective and overbearing
as the actual use of force in causing a party to enter into a post-nuptial contract
Standards of review Abuse of discretion clearly erroneous and de novo
2 ERROR TWO OVERTURNING THE FAMILY COURTS RULING FINDING THAT THE FEBRUARY 11 2009 POST -NUPTIAL AGREEMENT WAS NOT FAIR AND EQUITABLE
The Circuit Court erred below by upholding a post-nuptial drafted by the Respondent Husbands Attorney that (a) consigned a disproportionate percentage omarital assets to the Respondent Husband (b) did not attach documentation confirming the extent and values ofproperty (c) did not include all marital assets and (d) severely understated the anticipated annual income othe Respondent Husband who received the larger share ofmarital assets
Under the Post-Nuptial Agreement sub judice the Respondent Husband would
receive $466273800 worth of alleged separatemarital property while the Petitioner Wife would
receive a mere $9000000 worth ofalleged separate property In short the total marital estate of shy
$475273800 would give the Respondent Husband 9811 of the entire marital estate while the
Petitioner Wife would be left with only 189 of said marital estate
In addition to not includihg all arguably marital or separate assets the Respondent
Husband attached no documentation to the subject Post-Nuptial Agreement to substantiate the
fmancial and asset statements appended thereto as exhibits
Also the Respondent Husband grossly under-reported his anticipated income by
75 when indexed against his actual income for the year (2009) of the execution of said Post-
Nuptial Agreement and by over 8804 when compared to the preceding year of2008
2
Standards of review Abuse of discretion and clearly erroneous
3 ERROR THREE DETERMINING THAT RETAINED EARNINGS ARE THE ASSETS OF A FLOW THROUGH CORPORATIONRATHER THAN DISTRIBUTABLE MARITAL ASSETS SIMILAR TO ACTIVE APPRECIATION OF A SEPARATE BUSINESS WAS ERRONEOUS
The Circuit Court below erred as a matter oflaw when it overruled the Family Court and classified retained earnings ofa flow through corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Respondent Husband and Wife hadpaid income taxes on the retained earnings both before and after the Post-Nuptial Agreement
Retained earnings are not true assets of a corporation such as a corporate purchase
ofan automobile in its name Said monies upon which the Parties were already taxed herein
actually represent undistributed dividends or after tax income that can be considered reshy
contributions ofthe Parties to the capital ofthe corporation Simply put the corporate earnings
are taxed to the Parties but some of the Parties after tax earnings are left in the corporation to
insure adequate capitalization as if the monies had been withdrawn and then redeposited Retained
eafmngs can also be explained as the measure of active appreciation of a corporation
The tax driven structure of the subject Corporation was at separation of the
shareholding Parties herein a qualified sub-chapter S or a flow through corporation This
means that the profits l of the Corporation flow through to the shareholders as if they were
partners in that the only taxes on those profitsincome are those paid by the shareholders not the
Corporation
Standard of review De novo
STATEMENT OF THE CASE
1 Retained earnings are but residue ofprofits kept or retained in a corporation
3
Having met at Glenville State College the Parties hereto entered into marriage on
June 30 1992 and had two children one ofeach gender both ofwhom are now emancipated2bull The
Respondent Husband herein Douglas Shane Morris was the scion of the Glenville oil and gas
tycoon 1 L Morris and in hope of the Respondent Husband ascending to his fathers station at
some point in the future he became a part owner in the family petroleum business called Waco Oil
and Gas Inc
The Fates decreed otherwise When the Respondent Husbands father became
disenchanted with the Respondent Husbands hedonistic and irresponsible life style the Respondent
Husband was terminated and his interest in Waco was purchased by his disappointed parent
Thereafter the Parties hereto with two young children in tow relocated to Roanoke Virginia
where they purchased with the Parties Waco buy-out monies in 2002 anopulent fifteen room
multilevel 6700 square feet mansion which was to be the familyS residence through mid 2005
when they returned to Gilmer County from Virginia The mechanics and motivations for the 2005
return3 were and are especially relevant to the principal issues raised in this case
Due to the Respondent Husbands substance abuse he and the Petitioner had
separated in Virginia about mid-December 2004 In an effort to reconcile and to raise their
children in an intact home the Respondent Husband promised the Petitioner that if she would
reunite with him and come back to Glenville he would build a comparable (to the Roanoke) home
in Gilmer County The Petitioner relented and agreed to reconcile on those terms The Parties did
indeed return to Gilmer County and at first lived in Wacos airport hanger and then the Parties
3The following factual representations are summarized from the July 112012 in-Court testimony of the Petitioner
4
purchased what the Petitioner thought was to be a temporary dwelling in the form of a double wide
modular home
For the next three plus years or into the beginning of2009 the Petitioner and her
two (2) children much to her frustration and embarrassment occupied a domicile that the Petitioner
stated would have fit within the bottom floor ofher former 6700 square feet Roanoke home
The Respondent Husband made various excuses for his failure to fulfill his earlier
promise regarding the erection of a much grander residence and the Petitioners desperation and
irritation with her and the childrens living arrangements brought matters to the point that the
Parties briefly separated for a second time in early 2009 After another reconciliation the
Respondent Husband finally revealed that his procrastination in building the promised home for his
family was that he had to have the fmancial assistance ofhis multimillionaire father to build such a
house and that his father was insisting on a post-nuptial agreement to protect what was anticipated
to be a $75000000 investment
Bowles Rice LLP the corporate attorneys employed by the Respondent Husbands
father were engaged to and did draft the post-nuptial agreement The Wife had the services of a
local Glenville attorney4 Timothy Butcher who was a friend to both Parties herein
Petitioner Wife had alleged and argued from the onset of the underlying action that
said PNA which as stated was prepared at the insistence of the Respondent Husbands father I L
Morris and drafted by corpora~e counsel of the Respondent Husbands father was entered into by
the Petitioner Wife under duress coercion and undue influence
4There is some lingering question whether the Petitioner Wifes counsel was independent where her attorney testified at the July 112012 hearing that he was paid for his representation of the Petitioner Wife by the Respondent Husbands paving his the lawyers residential driveway or by some other in-kind compensation from the Respondent Husband
5
Indeed Petitioners counsel Timothy Butcher testified on the record at the July 11
2012 trial that the Respondent Husband and his fathers attorney definitely held [the PNA-house
connection] over the Petitioner Wifes head in that the Petitioner Wifes attorney was clearly and
directly informed by counsel for the Respondent Husband that if she the Petitioner did not sign the
Post-Nuptial Agreement then the Respondent Husband would not complete construction on the
then pending and now former marital home ie no signature no house 5 See also Appendix p
31
Moreover the Petitioner Wifes attorney advised her not to sign the PNA but out
of an overriding desire to have an acceptable house built for her and her children consistent with her
and the childrens prior standard ofliving the Petitioner Wife signed anyway6 See Appendix p
32 After some negotiation on some minor points (but receiving no corroboration of
listedproperty values- Appendix p 32) and at that time after near~y seventeen (17) years of a
tenuous if not difficult marriage and two (2) children the Parties subscribed to the February 11
2009 Post-Nuptial Agreement (hereafter PNA) See Appendix ppl through 19
Said PNA which was also entered into more than seventeen (17) years after the
February 6 1992 formation ofFlying W Plastics Inc (hereafter Flying W) the ownership
interests ofwhich were representedjor thefirst time on appeal to the Circuit Court below or after
the trial before the Family Court Judge to have been given by the Respondent Husbands wealthy
father to the Respondent Husband and his lawyer sister Shelly Morris Demarino during the
marriage The Respondent Husband and his sister were and are the only shareholders of the closely
SIn-court testimony of attorney Timothy Butcher on July 11 2012 which was corroborated on the same date by the testimony of the Petitioner
6Ibid
6
held corporation which elected to become a Subchapter S or flow through corporation effective
July 120077
The evidence was unrefuted at trial and even confirmed by the Respondent
Husband himself by his own sworn testimony in open Court that he had exercised an active and a
high level of administrative participation on a daily basis in Flying W
Inspecting the document itself the terms of the PNA under scrutiny basically
consigned said Subchapter S Corporation (Flying W) and other marital assets constituting 9811
ofthe marital estate unto the Respondent Husband while the Petitioner Wife took only 189 of
such assets In addition said PNA contained only summary statements of finances by the Parties
ie no full financial disclosure was made due to an absence ofany supporting documentation
attached to the PNA Appendix pp 15 through 18
Also the Respondent Husband greatly understated his projected income for the
PNA year of2009 The Respondent Husband reported on the PNA that his estimated annual
income for 2009 would be $231000 Appendix p 16 In actuality the Parties adjusted gross
income for 2009 was $889862 or almost four (4) times more than the Respondent Husband led the
Wife to believe In comparison to 2008 the year prior to the PNA the Parties earned $1931914
which income as well as the aforesaid 2009 earnings were the products solely of the Respondent
Husbands efforts because the Petitioner Wife did not work during that year of2008 or the
following year of 2009 Compare Appendix p 16 with pp 154 and 158
Ofequal significance the PNA failed to include all marital or arguable marital
assets Several working interests in oil and gas wells across central West Virginia as well as the
7The 2011 gross receipts of Flying W were $4077339400 and $2855606100 in 2010 See Appendix pp 174 and 173 respectively which were Petitioners Exhibits at trial on December 262012
7
very double wide modular home the Petitioner Wife was seeking to leave were not listed in the
PNA attachments
Furthermore the retained earnings8 held by the aforesaid Corporation under the
Parties named account was not mentioned in the PNA Petitioner Wife maintained that even if
the PNA were valid and enforceable the retained earnings were not corporate assets and thus
distributable because the Parties had paid taxes on said earnings before and after the execution of
the PNA The Petitioner Wife also contended that even ifthe PNA were upheld as to the
Corporation those post PNA retained earnings had been commingled with other corporate assets
and monies thus causing a transmutation of the Flying W Corporation or at least its financial
accounts into marital assets
Lastly in the PNA the new house for which the Petitioner Wife gave up so much
was to be lived in by he Petitioner Wife rent free in the event ofa divorce with the Respondent
Husband servicing the mortgage until the Parties sold the marital residence at which time the
Petitioner Wife would receive all proceeds in excess of the mortgage payoff provided however the
Respondent Husband had the right offIrst refusal See Appendix p 8 As something ofamiddot
postscript the Petitioner Wife also testifIed at trial on July 11 2012 that the Respondent Hus1gtand
had failed to honor her whole consideration for signing off on the PNA viz the promised marital
house was never fInished which position the Respondent Husband minimized by saying that only
minor facets of the construction such as landscaping and closet doors remained undone
In essence the Petitioner Wife contended that the terms of said February 11 2009
Post-Nuptial Agreement were unfair and unconscionable to her and that despite having had access
8Retained earnings carried by Flying W in the name ofthe Respondent Husband and his sister for December 2011 were $1185363113 and $1434330786 as of the end ofDecember 2012 See Appendix pp 180 and 181
8
to legal advice coercion in the form ofdenying her and her children the upscale home for which she
had left a stately domicile in Virginia four (4) years past was present and overwhelmed what would
have otherwise been an unacceptable trade offin the context of the PNA Secondarily the
Petitioner Wife posited that even if the PNA were upheld the retained earnings of Flying W in
not being mentioned in the PNA were marital assets upon which the Parties had paid taxes and
thus the same were distributable in the pending divorce action
The Respondent Husband countered that the Petitioner Wife a college graduate
had voluntarily and knowingly entered into the PNA in disregard of the advice of counsel and that
his the Respondent Husbands undocumented financial disclosure was of no serious moment
Regarding the omission of retained earnings in the PNA the Respondent Husband urged that the
same were corporate and not marital assets and the retained earnings were therefore included in the
PNAs release ofFlying W to him
Both Parties agreed that the validity and enforceability of the PNA should first be
determined because the of the impact the Family Courts decision would have on the remaining
issues of the divorce proper Trial on the viability of the PNA commenced on June 22 2012 and
the taking of evidence continued and concluded on July 112012
At the close of the July 11 2012 hearing the Family Court Judge found that the
PNA should be upheld primarily because the Petitioner Wife had freely voluntarily and knowingly
entered into the February 112009 PNA without force or threat however the retained earnings of
Flying W were deemed to be marital assets subject to distribution Appendix p 34
The Final Hearing in the divorce was scheduled for December 26 2012 for the
purpose ofconcluding the case and determining the amount ofthe retained earnings on the January
9
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
TABLE OF AUTHORITIES
West Virginia Case Law
Carr v Hancock
216 WVa 474 607 SE2d 803 (2004) 16
Lee v Lee
228 WVa 483721 SE2d 53 (WVa 2011) 13
Loudermilk v Loudermilk
183 WVa 616397 SE2d 905 (1990) 23
Mayhew v Mayhew (Mayhew 1)
197 WVa 290475 SE2d 382 (1996) 17
Mayhew v Mayhew (Mayhew II)
205 WVa 490 519 SE2d 188 (1999)
Miller v Miller
189 WVa 126428 SE2d 547 (1993)
Perdue v Coiner
156 WVa 467 194 SE2d 657 (1973)
Protan v Ghannam
17
17
15
2011 LEXIS 121 (Memorandum Decision 2011) 16
Rosen v Rosen
222 WVa 402 664 SE2d 743 (2008) 16
Smith v Smith
197 WVa 505475 SE2d 881 (1996) footnote 11 26
Stephen LH v Sherry LH
195 WVa 384465 SE2d 841 (1995) 15
Teedv Teed
No 12-0232 (WVa filed May 172013) (Memorandum Decision) 22
iii
Welsh v Welsh
136 WVa 914 69 SE2d 34 (1952) 14
West Virginia Statutes
West Virginia Code sect48-1-233 23
West Virginia Code sect48-7-102 1220
West Virginia Code sect48-7-104 33
West Virginia Code sect48-8-103 10
Connecticut Case Law
Bedrick v Bedrick
300 Conn 691 696-697 17 A3d 1723 (2011) 15
Delaware Case Law
Ramon v Ramon
963 A2d 128 (Del 2008) 2730
Florida Case Law
Casto v Casto
508 So2d 330 334 (Fla 1987) 142021
Illinois Case Law
In re Marriage ofLundahl
919 NE2d 480 (Ill App 2009) 27
In re Marriage ofJoynt
375 Ill App 3d 817874 NE2d 916 (Ill App 2007) 27
Iowa Case Law
In Fe Casten
819 NW2d 426 (Iowa App 2012) 28
IV
Kansas Case Law
In re Marriage ofTraster
291 P3d 494 (Kan App 2012) 14
Massachusetts Case Law
Ansin v Craven-Ansin
457 Mass 283 289 929 NE2d 955 962 (2010) 14
Missouri Case Law
Heineman v Heineman
768 SW2d 130 (Mo App WD 1989) 28
New Jersey Case Law
Pacelli v Pacelli
319 NJ Super 185 190-196 725 A2d 56 (1999) 15
Ohio Case Law
Zaccardelli v Zaccardelli
2013 Ohio 1878 (Ohio App No 26262 2013) 282930
Other
American Law Institute Principles of the Law of Marital
Dissolution sect701(1)(b)(2002) 13
Blacks Law Dictionary (Abridged 5th Edition 1990) 25
Restatement (Second) of Contracts sect71 13
Rule 5(g) WVRRAP 1
Rule 18(a)(4) WVRRAP 12
Rule 20(a) WVRRAP 12
v
IN THE WEST VIRGINIA SUPREME COURT OF APPEALS
AT CHARLESTON
INRE THE MARRIAGE OF
KIMBERLEY A MORRIS Respondent Below
Petitioner
vs No 13-0742
DOUGLAS SHANE MORRIS Petitioner Below
Respondent
PETITIONERS BRIEF
Comes now the Petitioner KIMBERLEY A MORRIS Respondent
below (hereafter Petitioner Wife) by her counsel James Wilson Douglas pursuant to Rule 5(g)
ofthe Revised Rules ofAppellate Procedure of the West Virginia Supreme Court ofAppeals
and in and for her Brief for timely appeal oftpe Order below does aver depose and say as
follows
ASSIGNMENTS OF ERROR
1 ERROR ONE FAILURE TO EMPLOY A STRICTER STANDARD FOR WEIGIDNG THE VALIDITY AND ENFORCEABILTY OF A POST -NUPTIAL AGREEMENT IN A DIVORCE ACTION AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court erred below by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
When dealing with post-nuptial contracts the utmost fairness and good faith
should be observed by the party who gains the most from the transaction In the case of a preshy
nuptial a party can refuse to consummate the anticipated marriage This is wholly different in the
case where the party to the post-nuptial agreement is already in the marriage and may have a
number of other considerations such as children standard of living etc Therefore coercion undue
influence and duress though less obvious and more subtle can be just as effective and overbearing
as the actual use of force in causing a party to enter into a post-nuptial contract
Standards of review Abuse of discretion clearly erroneous and de novo
2 ERROR TWO OVERTURNING THE FAMILY COURTS RULING FINDING THAT THE FEBRUARY 11 2009 POST -NUPTIAL AGREEMENT WAS NOT FAIR AND EQUITABLE
The Circuit Court erred below by upholding a post-nuptial drafted by the Respondent Husbands Attorney that (a) consigned a disproportionate percentage omarital assets to the Respondent Husband (b) did not attach documentation confirming the extent and values ofproperty (c) did not include all marital assets and (d) severely understated the anticipated annual income othe Respondent Husband who received the larger share ofmarital assets
Under the Post-Nuptial Agreement sub judice the Respondent Husband would
receive $466273800 worth of alleged separatemarital property while the Petitioner Wife would
receive a mere $9000000 worth ofalleged separate property In short the total marital estate of shy
$475273800 would give the Respondent Husband 9811 of the entire marital estate while the
Petitioner Wife would be left with only 189 of said marital estate
In addition to not includihg all arguably marital or separate assets the Respondent
Husband attached no documentation to the subject Post-Nuptial Agreement to substantiate the
fmancial and asset statements appended thereto as exhibits
Also the Respondent Husband grossly under-reported his anticipated income by
75 when indexed against his actual income for the year (2009) of the execution of said Post-
Nuptial Agreement and by over 8804 when compared to the preceding year of2008
2
Standards of review Abuse of discretion and clearly erroneous
3 ERROR THREE DETERMINING THAT RETAINED EARNINGS ARE THE ASSETS OF A FLOW THROUGH CORPORATIONRATHER THAN DISTRIBUTABLE MARITAL ASSETS SIMILAR TO ACTIVE APPRECIATION OF A SEPARATE BUSINESS WAS ERRONEOUS
The Circuit Court below erred as a matter oflaw when it overruled the Family Court and classified retained earnings ofa flow through corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Respondent Husband and Wife hadpaid income taxes on the retained earnings both before and after the Post-Nuptial Agreement
Retained earnings are not true assets of a corporation such as a corporate purchase
ofan automobile in its name Said monies upon which the Parties were already taxed herein
actually represent undistributed dividends or after tax income that can be considered reshy
contributions ofthe Parties to the capital ofthe corporation Simply put the corporate earnings
are taxed to the Parties but some of the Parties after tax earnings are left in the corporation to
insure adequate capitalization as if the monies had been withdrawn and then redeposited Retained
eafmngs can also be explained as the measure of active appreciation of a corporation
The tax driven structure of the subject Corporation was at separation of the
shareholding Parties herein a qualified sub-chapter S or a flow through corporation This
means that the profits l of the Corporation flow through to the shareholders as if they were
partners in that the only taxes on those profitsincome are those paid by the shareholders not the
Corporation
Standard of review De novo
STATEMENT OF THE CASE
1 Retained earnings are but residue ofprofits kept or retained in a corporation
3
Having met at Glenville State College the Parties hereto entered into marriage on
June 30 1992 and had two children one ofeach gender both ofwhom are now emancipated2bull The
Respondent Husband herein Douglas Shane Morris was the scion of the Glenville oil and gas
tycoon 1 L Morris and in hope of the Respondent Husband ascending to his fathers station at
some point in the future he became a part owner in the family petroleum business called Waco Oil
and Gas Inc
The Fates decreed otherwise When the Respondent Husbands father became
disenchanted with the Respondent Husbands hedonistic and irresponsible life style the Respondent
Husband was terminated and his interest in Waco was purchased by his disappointed parent
Thereafter the Parties hereto with two young children in tow relocated to Roanoke Virginia
where they purchased with the Parties Waco buy-out monies in 2002 anopulent fifteen room
multilevel 6700 square feet mansion which was to be the familyS residence through mid 2005
when they returned to Gilmer County from Virginia The mechanics and motivations for the 2005
return3 were and are especially relevant to the principal issues raised in this case
Due to the Respondent Husbands substance abuse he and the Petitioner had
separated in Virginia about mid-December 2004 In an effort to reconcile and to raise their
children in an intact home the Respondent Husband promised the Petitioner that if she would
reunite with him and come back to Glenville he would build a comparable (to the Roanoke) home
in Gilmer County The Petitioner relented and agreed to reconcile on those terms The Parties did
indeed return to Gilmer County and at first lived in Wacos airport hanger and then the Parties
3The following factual representations are summarized from the July 112012 in-Court testimony of the Petitioner
4
purchased what the Petitioner thought was to be a temporary dwelling in the form of a double wide
modular home
For the next three plus years or into the beginning of2009 the Petitioner and her
two (2) children much to her frustration and embarrassment occupied a domicile that the Petitioner
stated would have fit within the bottom floor ofher former 6700 square feet Roanoke home
The Respondent Husband made various excuses for his failure to fulfill his earlier
promise regarding the erection of a much grander residence and the Petitioners desperation and
irritation with her and the childrens living arrangements brought matters to the point that the
Parties briefly separated for a second time in early 2009 After another reconciliation the
Respondent Husband finally revealed that his procrastination in building the promised home for his
family was that he had to have the fmancial assistance ofhis multimillionaire father to build such a
house and that his father was insisting on a post-nuptial agreement to protect what was anticipated
to be a $75000000 investment
Bowles Rice LLP the corporate attorneys employed by the Respondent Husbands
father were engaged to and did draft the post-nuptial agreement The Wife had the services of a
local Glenville attorney4 Timothy Butcher who was a friend to both Parties herein
Petitioner Wife had alleged and argued from the onset of the underlying action that
said PNA which as stated was prepared at the insistence of the Respondent Husbands father I L
Morris and drafted by corpora~e counsel of the Respondent Husbands father was entered into by
the Petitioner Wife under duress coercion and undue influence
4There is some lingering question whether the Petitioner Wifes counsel was independent where her attorney testified at the July 112012 hearing that he was paid for his representation of the Petitioner Wife by the Respondent Husbands paving his the lawyers residential driveway or by some other in-kind compensation from the Respondent Husband
5
Indeed Petitioners counsel Timothy Butcher testified on the record at the July 11
2012 trial that the Respondent Husband and his fathers attorney definitely held [the PNA-house
connection] over the Petitioner Wifes head in that the Petitioner Wifes attorney was clearly and
directly informed by counsel for the Respondent Husband that if she the Petitioner did not sign the
Post-Nuptial Agreement then the Respondent Husband would not complete construction on the
then pending and now former marital home ie no signature no house 5 See also Appendix p
31
Moreover the Petitioner Wifes attorney advised her not to sign the PNA but out
of an overriding desire to have an acceptable house built for her and her children consistent with her
and the childrens prior standard ofliving the Petitioner Wife signed anyway6 See Appendix p
32 After some negotiation on some minor points (but receiving no corroboration of
listedproperty values- Appendix p 32) and at that time after near~y seventeen (17) years of a
tenuous if not difficult marriage and two (2) children the Parties subscribed to the February 11
2009 Post-Nuptial Agreement (hereafter PNA) See Appendix ppl through 19
Said PNA which was also entered into more than seventeen (17) years after the
February 6 1992 formation ofFlying W Plastics Inc (hereafter Flying W) the ownership
interests ofwhich were representedjor thefirst time on appeal to the Circuit Court below or after
the trial before the Family Court Judge to have been given by the Respondent Husbands wealthy
father to the Respondent Husband and his lawyer sister Shelly Morris Demarino during the
marriage The Respondent Husband and his sister were and are the only shareholders of the closely
SIn-court testimony of attorney Timothy Butcher on July 11 2012 which was corroborated on the same date by the testimony of the Petitioner
6Ibid
6
held corporation which elected to become a Subchapter S or flow through corporation effective
July 120077
The evidence was unrefuted at trial and even confirmed by the Respondent
Husband himself by his own sworn testimony in open Court that he had exercised an active and a
high level of administrative participation on a daily basis in Flying W
Inspecting the document itself the terms of the PNA under scrutiny basically
consigned said Subchapter S Corporation (Flying W) and other marital assets constituting 9811
ofthe marital estate unto the Respondent Husband while the Petitioner Wife took only 189 of
such assets In addition said PNA contained only summary statements of finances by the Parties
ie no full financial disclosure was made due to an absence ofany supporting documentation
attached to the PNA Appendix pp 15 through 18
Also the Respondent Husband greatly understated his projected income for the
PNA year of2009 The Respondent Husband reported on the PNA that his estimated annual
income for 2009 would be $231000 Appendix p 16 In actuality the Parties adjusted gross
income for 2009 was $889862 or almost four (4) times more than the Respondent Husband led the
Wife to believe In comparison to 2008 the year prior to the PNA the Parties earned $1931914
which income as well as the aforesaid 2009 earnings were the products solely of the Respondent
Husbands efforts because the Petitioner Wife did not work during that year of2008 or the
following year of 2009 Compare Appendix p 16 with pp 154 and 158
Ofequal significance the PNA failed to include all marital or arguable marital
assets Several working interests in oil and gas wells across central West Virginia as well as the
7The 2011 gross receipts of Flying W were $4077339400 and $2855606100 in 2010 See Appendix pp 174 and 173 respectively which were Petitioners Exhibits at trial on December 262012
7
very double wide modular home the Petitioner Wife was seeking to leave were not listed in the
PNA attachments
Furthermore the retained earnings8 held by the aforesaid Corporation under the
Parties named account was not mentioned in the PNA Petitioner Wife maintained that even if
the PNA were valid and enforceable the retained earnings were not corporate assets and thus
distributable because the Parties had paid taxes on said earnings before and after the execution of
the PNA The Petitioner Wife also contended that even ifthe PNA were upheld as to the
Corporation those post PNA retained earnings had been commingled with other corporate assets
and monies thus causing a transmutation of the Flying W Corporation or at least its financial
accounts into marital assets
Lastly in the PNA the new house for which the Petitioner Wife gave up so much
was to be lived in by he Petitioner Wife rent free in the event ofa divorce with the Respondent
Husband servicing the mortgage until the Parties sold the marital residence at which time the
Petitioner Wife would receive all proceeds in excess of the mortgage payoff provided however the
Respondent Husband had the right offIrst refusal See Appendix p 8 As something ofamiddot
postscript the Petitioner Wife also testifIed at trial on July 11 2012 that the Respondent Hus1gtand
had failed to honor her whole consideration for signing off on the PNA viz the promised marital
house was never fInished which position the Respondent Husband minimized by saying that only
minor facets of the construction such as landscaping and closet doors remained undone
In essence the Petitioner Wife contended that the terms of said February 11 2009
Post-Nuptial Agreement were unfair and unconscionable to her and that despite having had access
8Retained earnings carried by Flying W in the name ofthe Respondent Husband and his sister for December 2011 were $1185363113 and $1434330786 as of the end ofDecember 2012 See Appendix pp 180 and 181
8
to legal advice coercion in the form ofdenying her and her children the upscale home for which she
had left a stately domicile in Virginia four (4) years past was present and overwhelmed what would
have otherwise been an unacceptable trade offin the context of the PNA Secondarily the
Petitioner Wife posited that even if the PNA were upheld the retained earnings of Flying W in
not being mentioned in the PNA were marital assets upon which the Parties had paid taxes and
thus the same were distributable in the pending divorce action
The Respondent Husband countered that the Petitioner Wife a college graduate
had voluntarily and knowingly entered into the PNA in disregard of the advice of counsel and that
his the Respondent Husbands undocumented financial disclosure was of no serious moment
Regarding the omission of retained earnings in the PNA the Respondent Husband urged that the
same were corporate and not marital assets and the retained earnings were therefore included in the
PNAs release ofFlying W to him
Both Parties agreed that the validity and enforceability of the PNA should first be
determined because the of the impact the Family Courts decision would have on the remaining
issues of the divorce proper Trial on the viability of the PNA commenced on June 22 2012 and
the taking of evidence continued and concluded on July 112012
At the close of the July 11 2012 hearing the Family Court Judge found that the
PNA should be upheld primarily because the Petitioner Wife had freely voluntarily and knowingly
entered into the February 112009 PNA without force or threat however the retained earnings of
Flying W were deemed to be marital assets subject to distribution Appendix p 34
The Final Hearing in the divorce was scheduled for December 26 2012 for the
purpose ofconcluding the case and determining the amount ofthe retained earnings on the January
9
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
Welsh v Welsh
136 WVa 914 69 SE2d 34 (1952) 14
West Virginia Statutes
West Virginia Code sect48-1-233 23
West Virginia Code sect48-7-102 1220
West Virginia Code sect48-7-104 33
West Virginia Code sect48-8-103 10
Connecticut Case Law
Bedrick v Bedrick
300 Conn 691 696-697 17 A3d 1723 (2011) 15
Delaware Case Law
Ramon v Ramon
963 A2d 128 (Del 2008) 2730
Florida Case Law
Casto v Casto
508 So2d 330 334 (Fla 1987) 142021
Illinois Case Law
In re Marriage ofLundahl
919 NE2d 480 (Ill App 2009) 27
In re Marriage ofJoynt
375 Ill App 3d 817874 NE2d 916 (Ill App 2007) 27
Iowa Case Law
In Fe Casten
819 NW2d 426 (Iowa App 2012) 28
IV
Kansas Case Law
In re Marriage ofTraster
291 P3d 494 (Kan App 2012) 14
Massachusetts Case Law
Ansin v Craven-Ansin
457 Mass 283 289 929 NE2d 955 962 (2010) 14
Missouri Case Law
Heineman v Heineman
768 SW2d 130 (Mo App WD 1989) 28
New Jersey Case Law
Pacelli v Pacelli
319 NJ Super 185 190-196 725 A2d 56 (1999) 15
Ohio Case Law
Zaccardelli v Zaccardelli
2013 Ohio 1878 (Ohio App No 26262 2013) 282930
Other
American Law Institute Principles of the Law of Marital
Dissolution sect701(1)(b)(2002) 13
Blacks Law Dictionary (Abridged 5th Edition 1990) 25
Restatement (Second) of Contracts sect71 13
Rule 5(g) WVRRAP 1
Rule 18(a)(4) WVRRAP 12
Rule 20(a) WVRRAP 12
v
IN THE WEST VIRGINIA SUPREME COURT OF APPEALS
AT CHARLESTON
INRE THE MARRIAGE OF
KIMBERLEY A MORRIS Respondent Below
Petitioner
vs No 13-0742
DOUGLAS SHANE MORRIS Petitioner Below
Respondent
PETITIONERS BRIEF
Comes now the Petitioner KIMBERLEY A MORRIS Respondent
below (hereafter Petitioner Wife) by her counsel James Wilson Douglas pursuant to Rule 5(g)
ofthe Revised Rules ofAppellate Procedure of the West Virginia Supreme Court ofAppeals
and in and for her Brief for timely appeal oftpe Order below does aver depose and say as
follows
ASSIGNMENTS OF ERROR
1 ERROR ONE FAILURE TO EMPLOY A STRICTER STANDARD FOR WEIGIDNG THE VALIDITY AND ENFORCEABILTY OF A POST -NUPTIAL AGREEMENT IN A DIVORCE ACTION AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court erred below by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
When dealing with post-nuptial contracts the utmost fairness and good faith
should be observed by the party who gains the most from the transaction In the case of a preshy
nuptial a party can refuse to consummate the anticipated marriage This is wholly different in the
case where the party to the post-nuptial agreement is already in the marriage and may have a
number of other considerations such as children standard of living etc Therefore coercion undue
influence and duress though less obvious and more subtle can be just as effective and overbearing
as the actual use of force in causing a party to enter into a post-nuptial contract
Standards of review Abuse of discretion clearly erroneous and de novo
2 ERROR TWO OVERTURNING THE FAMILY COURTS RULING FINDING THAT THE FEBRUARY 11 2009 POST -NUPTIAL AGREEMENT WAS NOT FAIR AND EQUITABLE
The Circuit Court erred below by upholding a post-nuptial drafted by the Respondent Husbands Attorney that (a) consigned a disproportionate percentage omarital assets to the Respondent Husband (b) did not attach documentation confirming the extent and values ofproperty (c) did not include all marital assets and (d) severely understated the anticipated annual income othe Respondent Husband who received the larger share ofmarital assets
Under the Post-Nuptial Agreement sub judice the Respondent Husband would
receive $466273800 worth of alleged separatemarital property while the Petitioner Wife would
receive a mere $9000000 worth ofalleged separate property In short the total marital estate of shy
$475273800 would give the Respondent Husband 9811 of the entire marital estate while the
Petitioner Wife would be left with only 189 of said marital estate
In addition to not includihg all arguably marital or separate assets the Respondent
Husband attached no documentation to the subject Post-Nuptial Agreement to substantiate the
fmancial and asset statements appended thereto as exhibits
Also the Respondent Husband grossly under-reported his anticipated income by
75 when indexed against his actual income for the year (2009) of the execution of said Post-
Nuptial Agreement and by over 8804 when compared to the preceding year of2008
2
Standards of review Abuse of discretion and clearly erroneous
3 ERROR THREE DETERMINING THAT RETAINED EARNINGS ARE THE ASSETS OF A FLOW THROUGH CORPORATIONRATHER THAN DISTRIBUTABLE MARITAL ASSETS SIMILAR TO ACTIVE APPRECIATION OF A SEPARATE BUSINESS WAS ERRONEOUS
The Circuit Court below erred as a matter oflaw when it overruled the Family Court and classified retained earnings ofa flow through corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Respondent Husband and Wife hadpaid income taxes on the retained earnings both before and after the Post-Nuptial Agreement
Retained earnings are not true assets of a corporation such as a corporate purchase
ofan automobile in its name Said monies upon which the Parties were already taxed herein
actually represent undistributed dividends or after tax income that can be considered reshy
contributions ofthe Parties to the capital ofthe corporation Simply put the corporate earnings
are taxed to the Parties but some of the Parties after tax earnings are left in the corporation to
insure adequate capitalization as if the monies had been withdrawn and then redeposited Retained
eafmngs can also be explained as the measure of active appreciation of a corporation
The tax driven structure of the subject Corporation was at separation of the
shareholding Parties herein a qualified sub-chapter S or a flow through corporation This
means that the profits l of the Corporation flow through to the shareholders as if they were
partners in that the only taxes on those profitsincome are those paid by the shareholders not the
Corporation
Standard of review De novo
STATEMENT OF THE CASE
1 Retained earnings are but residue ofprofits kept or retained in a corporation
3
Having met at Glenville State College the Parties hereto entered into marriage on
June 30 1992 and had two children one ofeach gender both ofwhom are now emancipated2bull The
Respondent Husband herein Douglas Shane Morris was the scion of the Glenville oil and gas
tycoon 1 L Morris and in hope of the Respondent Husband ascending to his fathers station at
some point in the future he became a part owner in the family petroleum business called Waco Oil
and Gas Inc
The Fates decreed otherwise When the Respondent Husbands father became
disenchanted with the Respondent Husbands hedonistic and irresponsible life style the Respondent
Husband was terminated and his interest in Waco was purchased by his disappointed parent
Thereafter the Parties hereto with two young children in tow relocated to Roanoke Virginia
where they purchased with the Parties Waco buy-out monies in 2002 anopulent fifteen room
multilevel 6700 square feet mansion which was to be the familyS residence through mid 2005
when they returned to Gilmer County from Virginia The mechanics and motivations for the 2005
return3 were and are especially relevant to the principal issues raised in this case
Due to the Respondent Husbands substance abuse he and the Petitioner had
separated in Virginia about mid-December 2004 In an effort to reconcile and to raise their
children in an intact home the Respondent Husband promised the Petitioner that if she would
reunite with him and come back to Glenville he would build a comparable (to the Roanoke) home
in Gilmer County The Petitioner relented and agreed to reconcile on those terms The Parties did
indeed return to Gilmer County and at first lived in Wacos airport hanger and then the Parties
3The following factual representations are summarized from the July 112012 in-Court testimony of the Petitioner
4
purchased what the Petitioner thought was to be a temporary dwelling in the form of a double wide
modular home
For the next three plus years or into the beginning of2009 the Petitioner and her
two (2) children much to her frustration and embarrassment occupied a domicile that the Petitioner
stated would have fit within the bottom floor ofher former 6700 square feet Roanoke home
The Respondent Husband made various excuses for his failure to fulfill his earlier
promise regarding the erection of a much grander residence and the Petitioners desperation and
irritation with her and the childrens living arrangements brought matters to the point that the
Parties briefly separated for a second time in early 2009 After another reconciliation the
Respondent Husband finally revealed that his procrastination in building the promised home for his
family was that he had to have the fmancial assistance ofhis multimillionaire father to build such a
house and that his father was insisting on a post-nuptial agreement to protect what was anticipated
to be a $75000000 investment
Bowles Rice LLP the corporate attorneys employed by the Respondent Husbands
father were engaged to and did draft the post-nuptial agreement The Wife had the services of a
local Glenville attorney4 Timothy Butcher who was a friend to both Parties herein
Petitioner Wife had alleged and argued from the onset of the underlying action that
said PNA which as stated was prepared at the insistence of the Respondent Husbands father I L
Morris and drafted by corpora~e counsel of the Respondent Husbands father was entered into by
the Petitioner Wife under duress coercion and undue influence
4There is some lingering question whether the Petitioner Wifes counsel was independent where her attorney testified at the July 112012 hearing that he was paid for his representation of the Petitioner Wife by the Respondent Husbands paving his the lawyers residential driveway or by some other in-kind compensation from the Respondent Husband
5
Indeed Petitioners counsel Timothy Butcher testified on the record at the July 11
2012 trial that the Respondent Husband and his fathers attorney definitely held [the PNA-house
connection] over the Petitioner Wifes head in that the Petitioner Wifes attorney was clearly and
directly informed by counsel for the Respondent Husband that if she the Petitioner did not sign the
Post-Nuptial Agreement then the Respondent Husband would not complete construction on the
then pending and now former marital home ie no signature no house 5 See also Appendix p
31
Moreover the Petitioner Wifes attorney advised her not to sign the PNA but out
of an overriding desire to have an acceptable house built for her and her children consistent with her
and the childrens prior standard ofliving the Petitioner Wife signed anyway6 See Appendix p
32 After some negotiation on some minor points (but receiving no corroboration of
listedproperty values- Appendix p 32) and at that time after near~y seventeen (17) years of a
tenuous if not difficult marriage and two (2) children the Parties subscribed to the February 11
2009 Post-Nuptial Agreement (hereafter PNA) See Appendix ppl through 19
Said PNA which was also entered into more than seventeen (17) years after the
February 6 1992 formation ofFlying W Plastics Inc (hereafter Flying W) the ownership
interests ofwhich were representedjor thefirst time on appeal to the Circuit Court below or after
the trial before the Family Court Judge to have been given by the Respondent Husbands wealthy
father to the Respondent Husband and his lawyer sister Shelly Morris Demarino during the
marriage The Respondent Husband and his sister were and are the only shareholders of the closely
SIn-court testimony of attorney Timothy Butcher on July 11 2012 which was corroborated on the same date by the testimony of the Petitioner
6Ibid
6
held corporation which elected to become a Subchapter S or flow through corporation effective
July 120077
The evidence was unrefuted at trial and even confirmed by the Respondent
Husband himself by his own sworn testimony in open Court that he had exercised an active and a
high level of administrative participation on a daily basis in Flying W
Inspecting the document itself the terms of the PNA under scrutiny basically
consigned said Subchapter S Corporation (Flying W) and other marital assets constituting 9811
ofthe marital estate unto the Respondent Husband while the Petitioner Wife took only 189 of
such assets In addition said PNA contained only summary statements of finances by the Parties
ie no full financial disclosure was made due to an absence ofany supporting documentation
attached to the PNA Appendix pp 15 through 18
Also the Respondent Husband greatly understated his projected income for the
PNA year of2009 The Respondent Husband reported on the PNA that his estimated annual
income for 2009 would be $231000 Appendix p 16 In actuality the Parties adjusted gross
income for 2009 was $889862 or almost four (4) times more than the Respondent Husband led the
Wife to believe In comparison to 2008 the year prior to the PNA the Parties earned $1931914
which income as well as the aforesaid 2009 earnings were the products solely of the Respondent
Husbands efforts because the Petitioner Wife did not work during that year of2008 or the
following year of 2009 Compare Appendix p 16 with pp 154 and 158
Ofequal significance the PNA failed to include all marital or arguable marital
assets Several working interests in oil and gas wells across central West Virginia as well as the
7The 2011 gross receipts of Flying W were $4077339400 and $2855606100 in 2010 See Appendix pp 174 and 173 respectively which were Petitioners Exhibits at trial on December 262012
7
very double wide modular home the Petitioner Wife was seeking to leave were not listed in the
PNA attachments
Furthermore the retained earnings8 held by the aforesaid Corporation under the
Parties named account was not mentioned in the PNA Petitioner Wife maintained that even if
the PNA were valid and enforceable the retained earnings were not corporate assets and thus
distributable because the Parties had paid taxes on said earnings before and after the execution of
the PNA The Petitioner Wife also contended that even ifthe PNA were upheld as to the
Corporation those post PNA retained earnings had been commingled with other corporate assets
and monies thus causing a transmutation of the Flying W Corporation or at least its financial
accounts into marital assets
Lastly in the PNA the new house for which the Petitioner Wife gave up so much
was to be lived in by he Petitioner Wife rent free in the event ofa divorce with the Respondent
Husband servicing the mortgage until the Parties sold the marital residence at which time the
Petitioner Wife would receive all proceeds in excess of the mortgage payoff provided however the
Respondent Husband had the right offIrst refusal See Appendix p 8 As something ofamiddot
postscript the Petitioner Wife also testifIed at trial on July 11 2012 that the Respondent Hus1gtand
had failed to honor her whole consideration for signing off on the PNA viz the promised marital
house was never fInished which position the Respondent Husband minimized by saying that only
minor facets of the construction such as landscaping and closet doors remained undone
In essence the Petitioner Wife contended that the terms of said February 11 2009
Post-Nuptial Agreement were unfair and unconscionable to her and that despite having had access
8Retained earnings carried by Flying W in the name ofthe Respondent Husband and his sister for December 2011 were $1185363113 and $1434330786 as of the end ofDecember 2012 See Appendix pp 180 and 181
8
to legal advice coercion in the form ofdenying her and her children the upscale home for which she
had left a stately domicile in Virginia four (4) years past was present and overwhelmed what would
have otherwise been an unacceptable trade offin the context of the PNA Secondarily the
Petitioner Wife posited that even if the PNA were upheld the retained earnings of Flying W in
not being mentioned in the PNA were marital assets upon which the Parties had paid taxes and
thus the same were distributable in the pending divorce action
The Respondent Husband countered that the Petitioner Wife a college graduate
had voluntarily and knowingly entered into the PNA in disregard of the advice of counsel and that
his the Respondent Husbands undocumented financial disclosure was of no serious moment
Regarding the omission of retained earnings in the PNA the Respondent Husband urged that the
same were corporate and not marital assets and the retained earnings were therefore included in the
PNAs release ofFlying W to him
Both Parties agreed that the validity and enforceability of the PNA should first be
determined because the of the impact the Family Courts decision would have on the remaining
issues of the divorce proper Trial on the viability of the PNA commenced on June 22 2012 and
the taking of evidence continued and concluded on July 112012
At the close of the July 11 2012 hearing the Family Court Judge found that the
PNA should be upheld primarily because the Petitioner Wife had freely voluntarily and knowingly
entered into the February 112009 PNA without force or threat however the retained earnings of
Flying W were deemed to be marital assets subject to distribution Appendix p 34
The Final Hearing in the divorce was scheduled for December 26 2012 for the
purpose ofconcluding the case and determining the amount ofthe retained earnings on the January
9
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
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This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
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are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
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Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
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childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
Kansas Case Law
In re Marriage ofTraster
291 P3d 494 (Kan App 2012) 14
Massachusetts Case Law
Ansin v Craven-Ansin
457 Mass 283 289 929 NE2d 955 962 (2010) 14
Missouri Case Law
Heineman v Heineman
768 SW2d 130 (Mo App WD 1989) 28
New Jersey Case Law
Pacelli v Pacelli
319 NJ Super 185 190-196 725 A2d 56 (1999) 15
Ohio Case Law
Zaccardelli v Zaccardelli
2013 Ohio 1878 (Ohio App No 26262 2013) 282930
Other
American Law Institute Principles of the Law of Marital
Dissolution sect701(1)(b)(2002) 13
Blacks Law Dictionary (Abridged 5th Edition 1990) 25
Restatement (Second) of Contracts sect71 13
Rule 5(g) WVRRAP 1
Rule 18(a)(4) WVRRAP 12
Rule 20(a) WVRRAP 12
v
IN THE WEST VIRGINIA SUPREME COURT OF APPEALS
AT CHARLESTON
INRE THE MARRIAGE OF
KIMBERLEY A MORRIS Respondent Below
Petitioner
vs No 13-0742
DOUGLAS SHANE MORRIS Petitioner Below
Respondent
PETITIONERS BRIEF
Comes now the Petitioner KIMBERLEY A MORRIS Respondent
below (hereafter Petitioner Wife) by her counsel James Wilson Douglas pursuant to Rule 5(g)
ofthe Revised Rules ofAppellate Procedure of the West Virginia Supreme Court ofAppeals
and in and for her Brief for timely appeal oftpe Order below does aver depose and say as
follows
ASSIGNMENTS OF ERROR
1 ERROR ONE FAILURE TO EMPLOY A STRICTER STANDARD FOR WEIGIDNG THE VALIDITY AND ENFORCEABILTY OF A POST -NUPTIAL AGREEMENT IN A DIVORCE ACTION AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court erred below by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
When dealing with post-nuptial contracts the utmost fairness and good faith
should be observed by the party who gains the most from the transaction In the case of a preshy
nuptial a party can refuse to consummate the anticipated marriage This is wholly different in the
case where the party to the post-nuptial agreement is already in the marriage and may have a
number of other considerations such as children standard of living etc Therefore coercion undue
influence and duress though less obvious and more subtle can be just as effective and overbearing
as the actual use of force in causing a party to enter into a post-nuptial contract
Standards of review Abuse of discretion clearly erroneous and de novo
2 ERROR TWO OVERTURNING THE FAMILY COURTS RULING FINDING THAT THE FEBRUARY 11 2009 POST -NUPTIAL AGREEMENT WAS NOT FAIR AND EQUITABLE
The Circuit Court erred below by upholding a post-nuptial drafted by the Respondent Husbands Attorney that (a) consigned a disproportionate percentage omarital assets to the Respondent Husband (b) did not attach documentation confirming the extent and values ofproperty (c) did not include all marital assets and (d) severely understated the anticipated annual income othe Respondent Husband who received the larger share ofmarital assets
Under the Post-Nuptial Agreement sub judice the Respondent Husband would
receive $466273800 worth of alleged separatemarital property while the Petitioner Wife would
receive a mere $9000000 worth ofalleged separate property In short the total marital estate of shy
$475273800 would give the Respondent Husband 9811 of the entire marital estate while the
Petitioner Wife would be left with only 189 of said marital estate
In addition to not includihg all arguably marital or separate assets the Respondent
Husband attached no documentation to the subject Post-Nuptial Agreement to substantiate the
fmancial and asset statements appended thereto as exhibits
Also the Respondent Husband grossly under-reported his anticipated income by
75 when indexed against his actual income for the year (2009) of the execution of said Post-
Nuptial Agreement and by over 8804 when compared to the preceding year of2008
2
Standards of review Abuse of discretion and clearly erroneous
3 ERROR THREE DETERMINING THAT RETAINED EARNINGS ARE THE ASSETS OF A FLOW THROUGH CORPORATIONRATHER THAN DISTRIBUTABLE MARITAL ASSETS SIMILAR TO ACTIVE APPRECIATION OF A SEPARATE BUSINESS WAS ERRONEOUS
The Circuit Court below erred as a matter oflaw when it overruled the Family Court and classified retained earnings ofa flow through corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Respondent Husband and Wife hadpaid income taxes on the retained earnings both before and after the Post-Nuptial Agreement
Retained earnings are not true assets of a corporation such as a corporate purchase
ofan automobile in its name Said monies upon which the Parties were already taxed herein
actually represent undistributed dividends or after tax income that can be considered reshy
contributions ofthe Parties to the capital ofthe corporation Simply put the corporate earnings
are taxed to the Parties but some of the Parties after tax earnings are left in the corporation to
insure adequate capitalization as if the monies had been withdrawn and then redeposited Retained
eafmngs can also be explained as the measure of active appreciation of a corporation
The tax driven structure of the subject Corporation was at separation of the
shareholding Parties herein a qualified sub-chapter S or a flow through corporation This
means that the profits l of the Corporation flow through to the shareholders as if they were
partners in that the only taxes on those profitsincome are those paid by the shareholders not the
Corporation
Standard of review De novo
STATEMENT OF THE CASE
1 Retained earnings are but residue ofprofits kept or retained in a corporation
3
Having met at Glenville State College the Parties hereto entered into marriage on
June 30 1992 and had two children one ofeach gender both ofwhom are now emancipated2bull The
Respondent Husband herein Douglas Shane Morris was the scion of the Glenville oil and gas
tycoon 1 L Morris and in hope of the Respondent Husband ascending to his fathers station at
some point in the future he became a part owner in the family petroleum business called Waco Oil
and Gas Inc
The Fates decreed otherwise When the Respondent Husbands father became
disenchanted with the Respondent Husbands hedonistic and irresponsible life style the Respondent
Husband was terminated and his interest in Waco was purchased by his disappointed parent
Thereafter the Parties hereto with two young children in tow relocated to Roanoke Virginia
where they purchased with the Parties Waco buy-out monies in 2002 anopulent fifteen room
multilevel 6700 square feet mansion which was to be the familyS residence through mid 2005
when they returned to Gilmer County from Virginia The mechanics and motivations for the 2005
return3 were and are especially relevant to the principal issues raised in this case
Due to the Respondent Husbands substance abuse he and the Petitioner had
separated in Virginia about mid-December 2004 In an effort to reconcile and to raise their
children in an intact home the Respondent Husband promised the Petitioner that if she would
reunite with him and come back to Glenville he would build a comparable (to the Roanoke) home
in Gilmer County The Petitioner relented and agreed to reconcile on those terms The Parties did
indeed return to Gilmer County and at first lived in Wacos airport hanger and then the Parties
3The following factual representations are summarized from the July 112012 in-Court testimony of the Petitioner
4
purchased what the Petitioner thought was to be a temporary dwelling in the form of a double wide
modular home
For the next three plus years or into the beginning of2009 the Petitioner and her
two (2) children much to her frustration and embarrassment occupied a domicile that the Petitioner
stated would have fit within the bottom floor ofher former 6700 square feet Roanoke home
The Respondent Husband made various excuses for his failure to fulfill his earlier
promise regarding the erection of a much grander residence and the Petitioners desperation and
irritation with her and the childrens living arrangements brought matters to the point that the
Parties briefly separated for a second time in early 2009 After another reconciliation the
Respondent Husband finally revealed that his procrastination in building the promised home for his
family was that he had to have the fmancial assistance ofhis multimillionaire father to build such a
house and that his father was insisting on a post-nuptial agreement to protect what was anticipated
to be a $75000000 investment
Bowles Rice LLP the corporate attorneys employed by the Respondent Husbands
father were engaged to and did draft the post-nuptial agreement The Wife had the services of a
local Glenville attorney4 Timothy Butcher who was a friend to both Parties herein
Petitioner Wife had alleged and argued from the onset of the underlying action that
said PNA which as stated was prepared at the insistence of the Respondent Husbands father I L
Morris and drafted by corpora~e counsel of the Respondent Husbands father was entered into by
the Petitioner Wife under duress coercion and undue influence
4There is some lingering question whether the Petitioner Wifes counsel was independent where her attorney testified at the July 112012 hearing that he was paid for his representation of the Petitioner Wife by the Respondent Husbands paving his the lawyers residential driveway or by some other in-kind compensation from the Respondent Husband
5
Indeed Petitioners counsel Timothy Butcher testified on the record at the July 11
2012 trial that the Respondent Husband and his fathers attorney definitely held [the PNA-house
connection] over the Petitioner Wifes head in that the Petitioner Wifes attorney was clearly and
directly informed by counsel for the Respondent Husband that if she the Petitioner did not sign the
Post-Nuptial Agreement then the Respondent Husband would not complete construction on the
then pending and now former marital home ie no signature no house 5 See also Appendix p
31
Moreover the Petitioner Wifes attorney advised her not to sign the PNA but out
of an overriding desire to have an acceptable house built for her and her children consistent with her
and the childrens prior standard ofliving the Petitioner Wife signed anyway6 See Appendix p
32 After some negotiation on some minor points (but receiving no corroboration of
listedproperty values- Appendix p 32) and at that time after near~y seventeen (17) years of a
tenuous if not difficult marriage and two (2) children the Parties subscribed to the February 11
2009 Post-Nuptial Agreement (hereafter PNA) See Appendix ppl through 19
Said PNA which was also entered into more than seventeen (17) years after the
February 6 1992 formation ofFlying W Plastics Inc (hereafter Flying W) the ownership
interests ofwhich were representedjor thefirst time on appeal to the Circuit Court below or after
the trial before the Family Court Judge to have been given by the Respondent Husbands wealthy
father to the Respondent Husband and his lawyer sister Shelly Morris Demarino during the
marriage The Respondent Husband and his sister were and are the only shareholders of the closely
SIn-court testimony of attorney Timothy Butcher on July 11 2012 which was corroborated on the same date by the testimony of the Petitioner
6Ibid
6
held corporation which elected to become a Subchapter S or flow through corporation effective
July 120077
The evidence was unrefuted at trial and even confirmed by the Respondent
Husband himself by his own sworn testimony in open Court that he had exercised an active and a
high level of administrative participation on a daily basis in Flying W
Inspecting the document itself the terms of the PNA under scrutiny basically
consigned said Subchapter S Corporation (Flying W) and other marital assets constituting 9811
ofthe marital estate unto the Respondent Husband while the Petitioner Wife took only 189 of
such assets In addition said PNA contained only summary statements of finances by the Parties
ie no full financial disclosure was made due to an absence ofany supporting documentation
attached to the PNA Appendix pp 15 through 18
Also the Respondent Husband greatly understated his projected income for the
PNA year of2009 The Respondent Husband reported on the PNA that his estimated annual
income for 2009 would be $231000 Appendix p 16 In actuality the Parties adjusted gross
income for 2009 was $889862 or almost four (4) times more than the Respondent Husband led the
Wife to believe In comparison to 2008 the year prior to the PNA the Parties earned $1931914
which income as well as the aforesaid 2009 earnings were the products solely of the Respondent
Husbands efforts because the Petitioner Wife did not work during that year of2008 or the
following year of 2009 Compare Appendix p 16 with pp 154 and 158
Ofequal significance the PNA failed to include all marital or arguable marital
assets Several working interests in oil and gas wells across central West Virginia as well as the
7The 2011 gross receipts of Flying W were $4077339400 and $2855606100 in 2010 See Appendix pp 174 and 173 respectively which were Petitioners Exhibits at trial on December 262012
7
very double wide modular home the Petitioner Wife was seeking to leave were not listed in the
PNA attachments
Furthermore the retained earnings8 held by the aforesaid Corporation under the
Parties named account was not mentioned in the PNA Petitioner Wife maintained that even if
the PNA were valid and enforceable the retained earnings were not corporate assets and thus
distributable because the Parties had paid taxes on said earnings before and after the execution of
the PNA The Petitioner Wife also contended that even ifthe PNA were upheld as to the
Corporation those post PNA retained earnings had been commingled with other corporate assets
and monies thus causing a transmutation of the Flying W Corporation or at least its financial
accounts into marital assets
Lastly in the PNA the new house for which the Petitioner Wife gave up so much
was to be lived in by he Petitioner Wife rent free in the event ofa divorce with the Respondent
Husband servicing the mortgage until the Parties sold the marital residence at which time the
Petitioner Wife would receive all proceeds in excess of the mortgage payoff provided however the
Respondent Husband had the right offIrst refusal See Appendix p 8 As something ofamiddot
postscript the Petitioner Wife also testifIed at trial on July 11 2012 that the Respondent Hus1gtand
had failed to honor her whole consideration for signing off on the PNA viz the promised marital
house was never fInished which position the Respondent Husband minimized by saying that only
minor facets of the construction such as landscaping and closet doors remained undone
In essence the Petitioner Wife contended that the terms of said February 11 2009
Post-Nuptial Agreement were unfair and unconscionable to her and that despite having had access
8Retained earnings carried by Flying W in the name ofthe Respondent Husband and his sister for December 2011 were $1185363113 and $1434330786 as of the end ofDecember 2012 See Appendix pp 180 and 181
8
to legal advice coercion in the form ofdenying her and her children the upscale home for which she
had left a stately domicile in Virginia four (4) years past was present and overwhelmed what would
have otherwise been an unacceptable trade offin the context of the PNA Secondarily the
Petitioner Wife posited that even if the PNA were upheld the retained earnings of Flying W in
not being mentioned in the PNA were marital assets upon which the Parties had paid taxes and
thus the same were distributable in the pending divorce action
The Respondent Husband countered that the Petitioner Wife a college graduate
had voluntarily and knowingly entered into the PNA in disregard of the advice of counsel and that
his the Respondent Husbands undocumented financial disclosure was of no serious moment
Regarding the omission of retained earnings in the PNA the Respondent Husband urged that the
same were corporate and not marital assets and the retained earnings were therefore included in the
PNAs release ofFlying W to him
Both Parties agreed that the validity and enforceability of the PNA should first be
determined because the of the impact the Family Courts decision would have on the remaining
issues of the divorce proper Trial on the viability of the PNA commenced on June 22 2012 and
the taking of evidence continued and concluded on July 112012
At the close of the July 11 2012 hearing the Family Court Judge found that the
PNA should be upheld primarily because the Petitioner Wife had freely voluntarily and knowingly
entered into the February 112009 PNA without force or threat however the retained earnings of
Flying W were deemed to be marital assets subject to distribution Appendix p 34
The Final Hearing in the divorce was scheduled for December 26 2012 for the
purpose ofconcluding the case and determining the amount ofthe retained earnings on the January
9
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
IN THE WEST VIRGINIA SUPREME COURT OF APPEALS
AT CHARLESTON
INRE THE MARRIAGE OF
KIMBERLEY A MORRIS Respondent Below
Petitioner
vs No 13-0742
DOUGLAS SHANE MORRIS Petitioner Below
Respondent
PETITIONERS BRIEF
Comes now the Petitioner KIMBERLEY A MORRIS Respondent
below (hereafter Petitioner Wife) by her counsel James Wilson Douglas pursuant to Rule 5(g)
ofthe Revised Rules ofAppellate Procedure of the West Virginia Supreme Court ofAppeals
and in and for her Brief for timely appeal oftpe Order below does aver depose and say as
follows
ASSIGNMENTS OF ERROR
1 ERROR ONE FAILURE TO EMPLOY A STRICTER STANDARD FOR WEIGIDNG THE VALIDITY AND ENFORCEABILTY OF A POST -NUPTIAL AGREEMENT IN A DIVORCE ACTION AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court erred below by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
When dealing with post-nuptial contracts the utmost fairness and good faith
should be observed by the party who gains the most from the transaction In the case of a preshy
nuptial a party can refuse to consummate the anticipated marriage This is wholly different in the
case where the party to the post-nuptial agreement is already in the marriage and may have a
number of other considerations such as children standard of living etc Therefore coercion undue
influence and duress though less obvious and more subtle can be just as effective and overbearing
as the actual use of force in causing a party to enter into a post-nuptial contract
Standards of review Abuse of discretion clearly erroneous and de novo
2 ERROR TWO OVERTURNING THE FAMILY COURTS RULING FINDING THAT THE FEBRUARY 11 2009 POST -NUPTIAL AGREEMENT WAS NOT FAIR AND EQUITABLE
The Circuit Court erred below by upholding a post-nuptial drafted by the Respondent Husbands Attorney that (a) consigned a disproportionate percentage omarital assets to the Respondent Husband (b) did not attach documentation confirming the extent and values ofproperty (c) did not include all marital assets and (d) severely understated the anticipated annual income othe Respondent Husband who received the larger share ofmarital assets
Under the Post-Nuptial Agreement sub judice the Respondent Husband would
receive $466273800 worth of alleged separatemarital property while the Petitioner Wife would
receive a mere $9000000 worth ofalleged separate property In short the total marital estate of shy
$475273800 would give the Respondent Husband 9811 of the entire marital estate while the
Petitioner Wife would be left with only 189 of said marital estate
In addition to not includihg all arguably marital or separate assets the Respondent
Husband attached no documentation to the subject Post-Nuptial Agreement to substantiate the
fmancial and asset statements appended thereto as exhibits
Also the Respondent Husband grossly under-reported his anticipated income by
75 when indexed against his actual income for the year (2009) of the execution of said Post-
Nuptial Agreement and by over 8804 when compared to the preceding year of2008
2
Standards of review Abuse of discretion and clearly erroneous
3 ERROR THREE DETERMINING THAT RETAINED EARNINGS ARE THE ASSETS OF A FLOW THROUGH CORPORATIONRATHER THAN DISTRIBUTABLE MARITAL ASSETS SIMILAR TO ACTIVE APPRECIATION OF A SEPARATE BUSINESS WAS ERRONEOUS
The Circuit Court below erred as a matter oflaw when it overruled the Family Court and classified retained earnings ofa flow through corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Respondent Husband and Wife hadpaid income taxes on the retained earnings both before and after the Post-Nuptial Agreement
Retained earnings are not true assets of a corporation such as a corporate purchase
ofan automobile in its name Said monies upon which the Parties were already taxed herein
actually represent undistributed dividends or after tax income that can be considered reshy
contributions ofthe Parties to the capital ofthe corporation Simply put the corporate earnings
are taxed to the Parties but some of the Parties after tax earnings are left in the corporation to
insure adequate capitalization as if the monies had been withdrawn and then redeposited Retained
eafmngs can also be explained as the measure of active appreciation of a corporation
The tax driven structure of the subject Corporation was at separation of the
shareholding Parties herein a qualified sub-chapter S or a flow through corporation This
means that the profits l of the Corporation flow through to the shareholders as if they were
partners in that the only taxes on those profitsincome are those paid by the shareholders not the
Corporation
Standard of review De novo
STATEMENT OF THE CASE
1 Retained earnings are but residue ofprofits kept or retained in a corporation
3
Having met at Glenville State College the Parties hereto entered into marriage on
June 30 1992 and had two children one ofeach gender both ofwhom are now emancipated2bull The
Respondent Husband herein Douglas Shane Morris was the scion of the Glenville oil and gas
tycoon 1 L Morris and in hope of the Respondent Husband ascending to his fathers station at
some point in the future he became a part owner in the family petroleum business called Waco Oil
and Gas Inc
The Fates decreed otherwise When the Respondent Husbands father became
disenchanted with the Respondent Husbands hedonistic and irresponsible life style the Respondent
Husband was terminated and his interest in Waco was purchased by his disappointed parent
Thereafter the Parties hereto with two young children in tow relocated to Roanoke Virginia
where they purchased with the Parties Waco buy-out monies in 2002 anopulent fifteen room
multilevel 6700 square feet mansion which was to be the familyS residence through mid 2005
when they returned to Gilmer County from Virginia The mechanics and motivations for the 2005
return3 were and are especially relevant to the principal issues raised in this case
Due to the Respondent Husbands substance abuse he and the Petitioner had
separated in Virginia about mid-December 2004 In an effort to reconcile and to raise their
children in an intact home the Respondent Husband promised the Petitioner that if she would
reunite with him and come back to Glenville he would build a comparable (to the Roanoke) home
in Gilmer County The Petitioner relented and agreed to reconcile on those terms The Parties did
indeed return to Gilmer County and at first lived in Wacos airport hanger and then the Parties
3The following factual representations are summarized from the July 112012 in-Court testimony of the Petitioner
4
purchased what the Petitioner thought was to be a temporary dwelling in the form of a double wide
modular home
For the next three plus years or into the beginning of2009 the Petitioner and her
two (2) children much to her frustration and embarrassment occupied a domicile that the Petitioner
stated would have fit within the bottom floor ofher former 6700 square feet Roanoke home
The Respondent Husband made various excuses for his failure to fulfill his earlier
promise regarding the erection of a much grander residence and the Petitioners desperation and
irritation with her and the childrens living arrangements brought matters to the point that the
Parties briefly separated for a second time in early 2009 After another reconciliation the
Respondent Husband finally revealed that his procrastination in building the promised home for his
family was that he had to have the fmancial assistance ofhis multimillionaire father to build such a
house and that his father was insisting on a post-nuptial agreement to protect what was anticipated
to be a $75000000 investment
Bowles Rice LLP the corporate attorneys employed by the Respondent Husbands
father were engaged to and did draft the post-nuptial agreement The Wife had the services of a
local Glenville attorney4 Timothy Butcher who was a friend to both Parties herein
Petitioner Wife had alleged and argued from the onset of the underlying action that
said PNA which as stated was prepared at the insistence of the Respondent Husbands father I L
Morris and drafted by corpora~e counsel of the Respondent Husbands father was entered into by
the Petitioner Wife under duress coercion and undue influence
4There is some lingering question whether the Petitioner Wifes counsel was independent where her attorney testified at the July 112012 hearing that he was paid for his representation of the Petitioner Wife by the Respondent Husbands paving his the lawyers residential driveway or by some other in-kind compensation from the Respondent Husband
5
Indeed Petitioners counsel Timothy Butcher testified on the record at the July 11
2012 trial that the Respondent Husband and his fathers attorney definitely held [the PNA-house
connection] over the Petitioner Wifes head in that the Petitioner Wifes attorney was clearly and
directly informed by counsel for the Respondent Husband that if she the Petitioner did not sign the
Post-Nuptial Agreement then the Respondent Husband would not complete construction on the
then pending and now former marital home ie no signature no house 5 See also Appendix p
31
Moreover the Petitioner Wifes attorney advised her not to sign the PNA but out
of an overriding desire to have an acceptable house built for her and her children consistent with her
and the childrens prior standard ofliving the Petitioner Wife signed anyway6 See Appendix p
32 After some negotiation on some minor points (but receiving no corroboration of
listedproperty values- Appendix p 32) and at that time after near~y seventeen (17) years of a
tenuous if not difficult marriage and two (2) children the Parties subscribed to the February 11
2009 Post-Nuptial Agreement (hereafter PNA) See Appendix ppl through 19
Said PNA which was also entered into more than seventeen (17) years after the
February 6 1992 formation ofFlying W Plastics Inc (hereafter Flying W) the ownership
interests ofwhich were representedjor thefirst time on appeal to the Circuit Court below or after
the trial before the Family Court Judge to have been given by the Respondent Husbands wealthy
father to the Respondent Husband and his lawyer sister Shelly Morris Demarino during the
marriage The Respondent Husband and his sister were and are the only shareholders of the closely
SIn-court testimony of attorney Timothy Butcher on July 11 2012 which was corroborated on the same date by the testimony of the Petitioner
6Ibid
6
held corporation which elected to become a Subchapter S or flow through corporation effective
July 120077
The evidence was unrefuted at trial and even confirmed by the Respondent
Husband himself by his own sworn testimony in open Court that he had exercised an active and a
high level of administrative participation on a daily basis in Flying W
Inspecting the document itself the terms of the PNA under scrutiny basically
consigned said Subchapter S Corporation (Flying W) and other marital assets constituting 9811
ofthe marital estate unto the Respondent Husband while the Petitioner Wife took only 189 of
such assets In addition said PNA contained only summary statements of finances by the Parties
ie no full financial disclosure was made due to an absence ofany supporting documentation
attached to the PNA Appendix pp 15 through 18
Also the Respondent Husband greatly understated his projected income for the
PNA year of2009 The Respondent Husband reported on the PNA that his estimated annual
income for 2009 would be $231000 Appendix p 16 In actuality the Parties adjusted gross
income for 2009 was $889862 or almost four (4) times more than the Respondent Husband led the
Wife to believe In comparison to 2008 the year prior to the PNA the Parties earned $1931914
which income as well as the aforesaid 2009 earnings were the products solely of the Respondent
Husbands efforts because the Petitioner Wife did not work during that year of2008 or the
following year of 2009 Compare Appendix p 16 with pp 154 and 158
Ofequal significance the PNA failed to include all marital or arguable marital
assets Several working interests in oil and gas wells across central West Virginia as well as the
7The 2011 gross receipts of Flying W were $4077339400 and $2855606100 in 2010 See Appendix pp 174 and 173 respectively which were Petitioners Exhibits at trial on December 262012
7
very double wide modular home the Petitioner Wife was seeking to leave were not listed in the
PNA attachments
Furthermore the retained earnings8 held by the aforesaid Corporation under the
Parties named account was not mentioned in the PNA Petitioner Wife maintained that even if
the PNA were valid and enforceable the retained earnings were not corporate assets and thus
distributable because the Parties had paid taxes on said earnings before and after the execution of
the PNA The Petitioner Wife also contended that even ifthe PNA were upheld as to the
Corporation those post PNA retained earnings had been commingled with other corporate assets
and monies thus causing a transmutation of the Flying W Corporation or at least its financial
accounts into marital assets
Lastly in the PNA the new house for which the Petitioner Wife gave up so much
was to be lived in by he Petitioner Wife rent free in the event ofa divorce with the Respondent
Husband servicing the mortgage until the Parties sold the marital residence at which time the
Petitioner Wife would receive all proceeds in excess of the mortgage payoff provided however the
Respondent Husband had the right offIrst refusal See Appendix p 8 As something ofamiddot
postscript the Petitioner Wife also testifIed at trial on July 11 2012 that the Respondent Hus1gtand
had failed to honor her whole consideration for signing off on the PNA viz the promised marital
house was never fInished which position the Respondent Husband minimized by saying that only
minor facets of the construction such as landscaping and closet doors remained undone
In essence the Petitioner Wife contended that the terms of said February 11 2009
Post-Nuptial Agreement were unfair and unconscionable to her and that despite having had access
8Retained earnings carried by Flying W in the name ofthe Respondent Husband and his sister for December 2011 were $1185363113 and $1434330786 as of the end ofDecember 2012 See Appendix pp 180 and 181
8
to legal advice coercion in the form ofdenying her and her children the upscale home for which she
had left a stately domicile in Virginia four (4) years past was present and overwhelmed what would
have otherwise been an unacceptable trade offin the context of the PNA Secondarily the
Petitioner Wife posited that even if the PNA were upheld the retained earnings of Flying W in
not being mentioned in the PNA were marital assets upon which the Parties had paid taxes and
thus the same were distributable in the pending divorce action
The Respondent Husband countered that the Petitioner Wife a college graduate
had voluntarily and knowingly entered into the PNA in disregard of the advice of counsel and that
his the Respondent Husbands undocumented financial disclosure was of no serious moment
Regarding the omission of retained earnings in the PNA the Respondent Husband urged that the
same were corporate and not marital assets and the retained earnings were therefore included in the
PNAs release ofFlying W to him
Both Parties agreed that the validity and enforceability of the PNA should first be
determined because the of the impact the Family Courts decision would have on the remaining
issues of the divorce proper Trial on the viability of the PNA commenced on June 22 2012 and
the taking of evidence continued and concluded on July 112012
At the close of the July 11 2012 hearing the Family Court Judge found that the
PNA should be upheld primarily because the Petitioner Wife had freely voluntarily and knowingly
entered into the February 112009 PNA without force or threat however the retained earnings of
Flying W were deemed to be marital assets subject to distribution Appendix p 34
The Final Hearing in the divorce was scheduled for December 26 2012 for the
purpose ofconcluding the case and determining the amount ofthe retained earnings on the January
9
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
should be observed by the party who gains the most from the transaction In the case of a preshy
nuptial a party can refuse to consummate the anticipated marriage This is wholly different in the
case where the party to the post-nuptial agreement is already in the marriage and may have a
number of other considerations such as children standard of living etc Therefore coercion undue
influence and duress though less obvious and more subtle can be just as effective and overbearing
as the actual use of force in causing a party to enter into a post-nuptial contract
Standards of review Abuse of discretion clearly erroneous and de novo
2 ERROR TWO OVERTURNING THE FAMILY COURTS RULING FINDING THAT THE FEBRUARY 11 2009 POST -NUPTIAL AGREEMENT WAS NOT FAIR AND EQUITABLE
The Circuit Court erred below by upholding a post-nuptial drafted by the Respondent Husbands Attorney that (a) consigned a disproportionate percentage omarital assets to the Respondent Husband (b) did not attach documentation confirming the extent and values ofproperty (c) did not include all marital assets and (d) severely understated the anticipated annual income othe Respondent Husband who received the larger share ofmarital assets
Under the Post-Nuptial Agreement sub judice the Respondent Husband would
receive $466273800 worth of alleged separatemarital property while the Petitioner Wife would
receive a mere $9000000 worth ofalleged separate property In short the total marital estate of shy
$475273800 would give the Respondent Husband 9811 of the entire marital estate while the
Petitioner Wife would be left with only 189 of said marital estate
In addition to not includihg all arguably marital or separate assets the Respondent
Husband attached no documentation to the subject Post-Nuptial Agreement to substantiate the
fmancial and asset statements appended thereto as exhibits
Also the Respondent Husband grossly under-reported his anticipated income by
75 when indexed against his actual income for the year (2009) of the execution of said Post-
Nuptial Agreement and by over 8804 when compared to the preceding year of2008
2
Standards of review Abuse of discretion and clearly erroneous
3 ERROR THREE DETERMINING THAT RETAINED EARNINGS ARE THE ASSETS OF A FLOW THROUGH CORPORATIONRATHER THAN DISTRIBUTABLE MARITAL ASSETS SIMILAR TO ACTIVE APPRECIATION OF A SEPARATE BUSINESS WAS ERRONEOUS
The Circuit Court below erred as a matter oflaw when it overruled the Family Court and classified retained earnings ofa flow through corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Respondent Husband and Wife hadpaid income taxes on the retained earnings both before and after the Post-Nuptial Agreement
Retained earnings are not true assets of a corporation such as a corporate purchase
ofan automobile in its name Said monies upon which the Parties were already taxed herein
actually represent undistributed dividends or after tax income that can be considered reshy
contributions ofthe Parties to the capital ofthe corporation Simply put the corporate earnings
are taxed to the Parties but some of the Parties after tax earnings are left in the corporation to
insure adequate capitalization as if the monies had been withdrawn and then redeposited Retained
eafmngs can also be explained as the measure of active appreciation of a corporation
The tax driven structure of the subject Corporation was at separation of the
shareholding Parties herein a qualified sub-chapter S or a flow through corporation This
means that the profits l of the Corporation flow through to the shareholders as if they were
partners in that the only taxes on those profitsincome are those paid by the shareholders not the
Corporation
Standard of review De novo
STATEMENT OF THE CASE
1 Retained earnings are but residue ofprofits kept or retained in a corporation
3
Having met at Glenville State College the Parties hereto entered into marriage on
June 30 1992 and had two children one ofeach gender both ofwhom are now emancipated2bull The
Respondent Husband herein Douglas Shane Morris was the scion of the Glenville oil and gas
tycoon 1 L Morris and in hope of the Respondent Husband ascending to his fathers station at
some point in the future he became a part owner in the family petroleum business called Waco Oil
and Gas Inc
The Fates decreed otherwise When the Respondent Husbands father became
disenchanted with the Respondent Husbands hedonistic and irresponsible life style the Respondent
Husband was terminated and his interest in Waco was purchased by his disappointed parent
Thereafter the Parties hereto with two young children in tow relocated to Roanoke Virginia
where they purchased with the Parties Waco buy-out monies in 2002 anopulent fifteen room
multilevel 6700 square feet mansion which was to be the familyS residence through mid 2005
when they returned to Gilmer County from Virginia The mechanics and motivations for the 2005
return3 were and are especially relevant to the principal issues raised in this case
Due to the Respondent Husbands substance abuse he and the Petitioner had
separated in Virginia about mid-December 2004 In an effort to reconcile and to raise their
children in an intact home the Respondent Husband promised the Petitioner that if she would
reunite with him and come back to Glenville he would build a comparable (to the Roanoke) home
in Gilmer County The Petitioner relented and agreed to reconcile on those terms The Parties did
indeed return to Gilmer County and at first lived in Wacos airport hanger and then the Parties
3The following factual representations are summarized from the July 112012 in-Court testimony of the Petitioner
4
purchased what the Petitioner thought was to be a temporary dwelling in the form of a double wide
modular home
For the next three plus years or into the beginning of2009 the Petitioner and her
two (2) children much to her frustration and embarrassment occupied a domicile that the Petitioner
stated would have fit within the bottom floor ofher former 6700 square feet Roanoke home
The Respondent Husband made various excuses for his failure to fulfill his earlier
promise regarding the erection of a much grander residence and the Petitioners desperation and
irritation with her and the childrens living arrangements brought matters to the point that the
Parties briefly separated for a second time in early 2009 After another reconciliation the
Respondent Husband finally revealed that his procrastination in building the promised home for his
family was that he had to have the fmancial assistance ofhis multimillionaire father to build such a
house and that his father was insisting on a post-nuptial agreement to protect what was anticipated
to be a $75000000 investment
Bowles Rice LLP the corporate attorneys employed by the Respondent Husbands
father were engaged to and did draft the post-nuptial agreement The Wife had the services of a
local Glenville attorney4 Timothy Butcher who was a friend to both Parties herein
Petitioner Wife had alleged and argued from the onset of the underlying action that
said PNA which as stated was prepared at the insistence of the Respondent Husbands father I L
Morris and drafted by corpora~e counsel of the Respondent Husbands father was entered into by
the Petitioner Wife under duress coercion and undue influence
4There is some lingering question whether the Petitioner Wifes counsel was independent where her attorney testified at the July 112012 hearing that he was paid for his representation of the Petitioner Wife by the Respondent Husbands paving his the lawyers residential driveway or by some other in-kind compensation from the Respondent Husband
5
Indeed Petitioners counsel Timothy Butcher testified on the record at the July 11
2012 trial that the Respondent Husband and his fathers attorney definitely held [the PNA-house
connection] over the Petitioner Wifes head in that the Petitioner Wifes attorney was clearly and
directly informed by counsel for the Respondent Husband that if she the Petitioner did not sign the
Post-Nuptial Agreement then the Respondent Husband would not complete construction on the
then pending and now former marital home ie no signature no house 5 See also Appendix p
31
Moreover the Petitioner Wifes attorney advised her not to sign the PNA but out
of an overriding desire to have an acceptable house built for her and her children consistent with her
and the childrens prior standard ofliving the Petitioner Wife signed anyway6 See Appendix p
32 After some negotiation on some minor points (but receiving no corroboration of
listedproperty values- Appendix p 32) and at that time after near~y seventeen (17) years of a
tenuous if not difficult marriage and two (2) children the Parties subscribed to the February 11
2009 Post-Nuptial Agreement (hereafter PNA) See Appendix ppl through 19
Said PNA which was also entered into more than seventeen (17) years after the
February 6 1992 formation ofFlying W Plastics Inc (hereafter Flying W) the ownership
interests ofwhich were representedjor thefirst time on appeal to the Circuit Court below or after
the trial before the Family Court Judge to have been given by the Respondent Husbands wealthy
father to the Respondent Husband and his lawyer sister Shelly Morris Demarino during the
marriage The Respondent Husband and his sister were and are the only shareholders of the closely
SIn-court testimony of attorney Timothy Butcher on July 11 2012 which was corroborated on the same date by the testimony of the Petitioner
6Ibid
6
held corporation which elected to become a Subchapter S or flow through corporation effective
July 120077
The evidence was unrefuted at trial and even confirmed by the Respondent
Husband himself by his own sworn testimony in open Court that he had exercised an active and a
high level of administrative participation on a daily basis in Flying W
Inspecting the document itself the terms of the PNA under scrutiny basically
consigned said Subchapter S Corporation (Flying W) and other marital assets constituting 9811
ofthe marital estate unto the Respondent Husband while the Petitioner Wife took only 189 of
such assets In addition said PNA contained only summary statements of finances by the Parties
ie no full financial disclosure was made due to an absence ofany supporting documentation
attached to the PNA Appendix pp 15 through 18
Also the Respondent Husband greatly understated his projected income for the
PNA year of2009 The Respondent Husband reported on the PNA that his estimated annual
income for 2009 would be $231000 Appendix p 16 In actuality the Parties adjusted gross
income for 2009 was $889862 or almost four (4) times more than the Respondent Husband led the
Wife to believe In comparison to 2008 the year prior to the PNA the Parties earned $1931914
which income as well as the aforesaid 2009 earnings were the products solely of the Respondent
Husbands efforts because the Petitioner Wife did not work during that year of2008 or the
following year of 2009 Compare Appendix p 16 with pp 154 and 158
Ofequal significance the PNA failed to include all marital or arguable marital
assets Several working interests in oil and gas wells across central West Virginia as well as the
7The 2011 gross receipts of Flying W were $4077339400 and $2855606100 in 2010 See Appendix pp 174 and 173 respectively which were Petitioners Exhibits at trial on December 262012
7
very double wide modular home the Petitioner Wife was seeking to leave were not listed in the
PNA attachments
Furthermore the retained earnings8 held by the aforesaid Corporation under the
Parties named account was not mentioned in the PNA Petitioner Wife maintained that even if
the PNA were valid and enforceable the retained earnings were not corporate assets and thus
distributable because the Parties had paid taxes on said earnings before and after the execution of
the PNA The Petitioner Wife also contended that even ifthe PNA were upheld as to the
Corporation those post PNA retained earnings had been commingled with other corporate assets
and monies thus causing a transmutation of the Flying W Corporation or at least its financial
accounts into marital assets
Lastly in the PNA the new house for which the Petitioner Wife gave up so much
was to be lived in by he Petitioner Wife rent free in the event ofa divorce with the Respondent
Husband servicing the mortgage until the Parties sold the marital residence at which time the
Petitioner Wife would receive all proceeds in excess of the mortgage payoff provided however the
Respondent Husband had the right offIrst refusal See Appendix p 8 As something ofamiddot
postscript the Petitioner Wife also testifIed at trial on July 11 2012 that the Respondent Hus1gtand
had failed to honor her whole consideration for signing off on the PNA viz the promised marital
house was never fInished which position the Respondent Husband minimized by saying that only
minor facets of the construction such as landscaping and closet doors remained undone
In essence the Petitioner Wife contended that the terms of said February 11 2009
Post-Nuptial Agreement were unfair and unconscionable to her and that despite having had access
8Retained earnings carried by Flying W in the name ofthe Respondent Husband and his sister for December 2011 were $1185363113 and $1434330786 as of the end ofDecember 2012 See Appendix pp 180 and 181
8
to legal advice coercion in the form ofdenying her and her children the upscale home for which she
had left a stately domicile in Virginia four (4) years past was present and overwhelmed what would
have otherwise been an unacceptable trade offin the context of the PNA Secondarily the
Petitioner Wife posited that even if the PNA were upheld the retained earnings of Flying W in
not being mentioned in the PNA were marital assets upon which the Parties had paid taxes and
thus the same were distributable in the pending divorce action
The Respondent Husband countered that the Petitioner Wife a college graduate
had voluntarily and knowingly entered into the PNA in disregard of the advice of counsel and that
his the Respondent Husbands undocumented financial disclosure was of no serious moment
Regarding the omission of retained earnings in the PNA the Respondent Husband urged that the
same were corporate and not marital assets and the retained earnings were therefore included in the
PNAs release ofFlying W to him
Both Parties agreed that the validity and enforceability of the PNA should first be
determined because the of the impact the Family Courts decision would have on the remaining
issues of the divorce proper Trial on the viability of the PNA commenced on June 22 2012 and
the taking of evidence continued and concluded on July 112012
At the close of the July 11 2012 hearing the Family Court Judge found that the
PNA should be upheld primarily because the Petitioner Wife had freely voluntarily and knowingly
entered into the February 112009 PNA without force or threat however the retained earnings of
Flying W were deemed to be marital assets subject to distribution Appendix p 34
The Final Hearing in the divorce was scheduled for December 26 2012 for the
purpose ofconcluding the case and determining the amount ofthe retained earnings on the January
9
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
Standards of review Abuse of discretion and clearly erroneous
3 ERROR THREE DETERMINING THAT RETAINED EARNINGS ARE THE ASSETS OF A FLOW THROUGH CORPORATIONRATHER THAN DISTRIBUTABLE MARITAL ASSETS SIMILAR TO ACTIVE APPRECIATION OF A SEPARATE BUSINESS WAS ERRONEOUS
The Circuit Court below erred as a matter oflaw when it overruled the Family Court and classified retained earnings ofa flow through corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Respondent Husband and Wife hadpaid income taxes on the retained earnings both before and after the Post-Nuptial Agreement
Retained earnings are not true assets of a corporation such as a corporate purchase
ofan automobile in its name Said monies upon which the Parties were already taxed herein
actually represent undistributed dividends or after tax income that can be considered reshy
contributions ofthe Parties to the capital ofthe corporation Simply put the corporate earnings
are taxed to the Parties but some of the Parties after tax earnings are left in the corporation to
insure adequate capitalization as if the monies had been withdrawn and then redeposited Retained
eafmngs can also be explained as the measure of active appreciation of a corporation
The tax driven structure of the subject Corporation was at separation of the
shareholding Parties herein a qualified sub-chapter S or a flow through corporation This
means that the profits l of the Corporation flow through to the shareholders as if they were
partners in that the only taxes on those profitsincome are those paid by the shareholders not the
Corporation
Standard of review De novo
STATEMENT OF THE CASE
1 Retained earnings are but residue ofprofits kept or retained in a corporation
3
Having met at Glenville State College the Parties hereto entered into marriage on
June 30 1992 and had two children one ofeach gender both ofwhom are now emancipated2bull The
Respondent Husband herein Douglas Shane Morris was the scion of the Glenville oil and gas
tycoon 1 L Morris and in hope of the Respondent Husband ascending to his fathers station at
some point in the future he became a part owner in the family petroleum business called Waco Oil
and Gas Inc
The Fates decreed otherwise When the Respondent Husbands father became
disenchanted with the Respondent Husbands hedonistic and irresponsible life style the Respondent
Husband was terminated and his interest in Waco was purchased by his disappointed parent
Thereafter the Parties hereto with two young children in tow relocated to Roanoke Virginia
where they purchased with the Parties Waco buy-out monies in 2002 anopulent fifteen room
multilevel 6700 square feet mansion which was to be the familyS residence through mid 2005
when they returned to Gilmer County from Virginia The mechanics and motivations for the 2005
return3 were and are especially relevant to the principal issues raised in this case
Due to the Respondent Husbands substance abuse he and the Petitioner had
separated in Virginia about mid-December 2004 In an effort to reconcile and to raise their
children in an intact home the Respondent Husband promised the Petitioner that if she would
reunite with him and come back to Glenville he would build a comparable (to the Roanoke) home
in Gilmer County The Petitioner relented and agreed to reconcile on those terms The Parties did
indeed return to Gilmer County and at first lived in Wacos airport hanger and then the Parties
3The following factual representations are summarized from the July 112012 in-Court testimony of the Petitioner
4
purchased what the Petitioner thought was to be a temporary dwelling in the form of a double wide
modular home
For the next three plus years or into the beginning of2009 the Petitioner and her
two (2) children much to her frustration and embarrassment occupied a domicile that the Petitioner
stated would have fit within the bottom floor ofher former 6700 square feet Roanoke home
The Respondent Husband made various excuses for his failure to fulfill his earlier
promise regarding the erection of a much grander residence and the Petitioners desperation and
irritation with her and the childrens living arrangements brought matters to the point that the
Parties briefly separated for a second time in early 2009 After another reconciliation the
Respondent Husband finally revealed that his procrastination in building the promised home for his
family was that he had to have the fmancial assistance ofhis multimillionaire father to build such a
house and that his father was insisting on a post-nuptial agreement to protect what was anticipated
to be a $75000000 investment
Bowles Rice LLP the corporate attorneys employed by the Respondent Husbands
father were engaged to and did draft the post-nuptial agreement The Wife had the services of a
local Glenville attorney4 Timothy Butcher who was a friend to both Parties herein
Petitioner Wife had alleged and argued from the onset of the underlying action that
said PNA which as stated was prepared at the insistence of the Respondent Husbands father I L
Morris and drafted by corpora~e counsel of the Respondent Husbands father was entered into by
the Petitioner Wife under duress coercion and undue influence
4There is some lingering question whether the Petitioner Wifes counsel was independent where her attorney testified at the July 112012 hearing that he was paid for his representation of the Petitioner Wife by the Respondent Husbands paving his the lawyers residential driveway or by some other in-kind compensation from the Respondent Husband
5
Indeed Petitioners counsel Timothy Butcher testified on the record at the July 11
2012 trial that the Respondent Husband and his fathers attorney definitely held [the PNA-house
connection] over the Petitioner Wifes head in that the Petitioner Wifes attorney was clearly and
directly informed by counsel for the Respondent Husband that if she the Petitioner did not sign the
Post-Nuptial Agreement then the Respondent Husband would not complete construction on the
then pending and now former marital home ie no signature no house 5 See also Appendix p
31
Moreover the Petitioner Wifes attorney advised her not to sign the PNA but out
of an overriding desire to have an acceptable house built for her and her children consistent with her
and the childrens prior standard ofliving the Petitioner Wife signed anyway6 See Appendix p
32 After some negotiation on some minor points (but receiving no corroboration of
listedproperty values- Appendix p 32) and at that time after near~y seventeen (17) years of a
tenuous if not difficult marriage and two (2) children the Parties subscribed to the February 11
2009 Post-Nuptial Agreement (hereafter PNA) See Appendix ppl through 19
Said PNA which was also entered into more than seventeen (17) years after the
February 6 1992 formation ofFlying W Plastics Inc (hereafter Flying W) the ownership
interests ofwhich were representedjor thefirst time on appeal to the Circuit Court below or after
the trial before the Family Court Judge to have been given by the Respondent Husbands wealthy
father to the Respondent Husband and his lawyer sister Shelly Morris Demarino during the
marriage The Respondent Husband and his sister were and are the only shareholders of the closely
SIn-court testimony of attorney Timothy Butcher on July 11 2012 which was corroborated on the same date by the testimony of the Petitioner
6Ibid
6
held corporation which elected to become a Subchapter S or flow through corporation effective
July 120077
The evidence was unrefuted at trial and even confirmed by the Respondent
Husband himself by his own sworn testimony in open Court that he had exercised an active and a
high level of administrative participation on a daily basis in Flying W
Inspecting the document itself the terms of the PNA under scrutiny basically
consigned said Subchapter S Corporation (Flying W) and other marital assets constituting 9811
ofthe marital estate unto the Respondent Husband while the Petitioner Wife took only 189 of
such assets In addition said PNA contained only summary statements of finances by the Parties
ie no full financial disclosure was made due to an absence ofany supporting documentation
attached to the PNA Appendix pp 15 through 18
Also the Respondent Husband greatly understated his projected income for the
PNA year of2009 The Respondent Husband reported on the PNA that his estimated annual
income for 2009 would be $231000 Appendix p 16 In actuality the Parties adjusted gross
income for 2009 was $889862 or almost four (4) times more than the Respondent Husband led the
Wife to believe In comparison to 2008 the year prior to the PNA the Parties earned $1931914
which income as well as the aforesaid 2009 earnings were the products solely of the Respondent
Husbands efforts because the Petitioner Wife did not work during that year of2008 or the
following year of 2009 Compare Appendix p 16 with pp 154 and 158
Ofequal significance the PNA failed to include all marital or arguable marital
assets Several working interests in oil and gas wells across central West Virginia as well as the
7The 2011 gross receipts of Flying W were $4077339400 and $2855606100 in 2010 See Appendix pp 174 and 173 respectively which were Petitioners Exhibits at trial on December 262012
7
very double wide modular home the Petitioner Wife was seeking to leave were not listed in the
PNA attachments
Furthermore the retained earnings8 held by the aforesaid Corporation under the
Parties named account was not mentioned in the PNA Petitioner Wife maintained that even if
the PNA were valid and enforceable the retained earnings were not corporate assets and thus
distributable because the Parties had paid taxes on said earnings before and after the execution of
the PNA The Petitioner Wife also contended that even ifthe PNA were upheld as to the
Corporation those post PNA retained earnings had been commingled with other corporate assets
and monies thus causing a transmutation of the Flying W Corporation or at least its financial
accounts into marital assets
Lastly in the PNA the new house for which the Petitioner Wife gave up so much
was to be lived in by he Petitioner Wife rent free in the event ofa divorce with the Respondent
Husband servicing the mortgage until the Parties sold the marital residence at which time the
Petitioner Wife would receive all proceeds in excess of the mortgage payoff provided however the
Respondent Husband had the right offIrst refusal See Appendix p 8 As something ofamiddot
postscript the Petitioner Wife also testifIed at trial on July 11 2012 that the Respondent Hus1gtand
had failed to honor her whole consideration for signing off on the PNA viz the promised marital
house was never fInished which position the Respondent Husband minimized by saying that only
minor facets of the construction such as landscaping and closet doors remained undone
In essence the Petitioner Wife contended that the terms of said February 11 2009
Post-Nuptial Agreement were unfair and unconscionable to her and that despite having had access
8Retained earnings carried by Flying W in the name ofthe Respondent Husband and his sister for December 2011 were $1185363113 and $1434330786 as of the end ofDecember 2012 See Appendix pp 180 and 181
8
to legal advice coercion in the form ofdenying her and her children the upscale home for which she
had left a stately domicile in Virginia four (4) years past was present and overwhelmed what would
have otherwise been an unacceptable trade offin the context of the PNA Secondarily the
Petitioner Wife posited that even if the PNA were upheld the retained earnings of Flying W in
not being mentioned in the PNA were marital assets upon which the Parties had paid taxes and
thus the same were distributable in the pending divorce action
The Respondent Husband countered that the Petitioner Wife a college graduate
had voluntarily and knowingly entered into the PNA in disregard of the advice of counsel and that
his the Respondent Husbands undocumented financial disclosure was of no serious moment
Regarding the omission of retained earnings in the PNA the Respondent Husband urged that the
same were corporate and not marital assets and the retained earnings were therefore included in the
PNAs release ofFlying W to him
Both Parties agreed that the validity and enforceability of the PNA should first be
determined because the of the impact the Family Courts decision would have on the remaining
issues of the divorce proper Trial on the viability of the PNA commenced on June 22 2012 and
the taking of evidence continued and concluded on July 112012
At the close of the July 11 2012 hearing the Family Court Judge found that the
PNA should be upheld primarily because the Petitioner Wife had freely voluntarily and knowingly
entered into the February 112009 PNA without force or threat however the retained earnings of
Flying W were deemed to be marital assets subject to distribution Appendix p 34
The Final Hearing in the divorce was scheduled for December 26 2012 for the
purpose ofconcluding the case and determining the amount ofthe retained earnings on the January
9
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
Having met at Glenville State College the Parties hereto entered into marriage on
June 30 1992 and had two children one ofeach gender both ofwhom are now emancipated2bull The
Respondent Husband herein Douglas Shane Morris was the scion of the Glenville oil and gas
tycoon 1 L Morris and in hope of the Respondent Husband ascending to his fathers station at
some point in the future he became a part owner in the family petroleum business called Waco Oil
and Gas Inc
The Fates decreed otherwise When the Respondent Husbands father became
disenchanted with the Respondent Husbands hedonistic and irresponsible life style the Respondent
Husband was terminated and his interest in Waco was purchased by his disappointed parent
Thereafter the Parties hereto with two young children in tow relocated to Roanoke Virginia
where they purchased with the Parties Waco buy-out monies in 2002 anopulent fifteen room
multilevel 6700 square feet mansion which was to be the familyS residence through mid 2005
when they returned to Gilmer County from Virginia The mechanics and motivations for the 2005
return3 were and are especially relevant to the principal issues raised in this case
Due to the Respondent Husbands substance abuse he and the Petitioner had
separated in Virginia about mid-December 2004 In an effort to reconcile and to raise their
children in an intact home the Respondent Husband promised the Petitioner that if she would
reunite with him and come back to Glenville he would build a comparable (to the Roanoke) home
in Gilmer County The Petitioner relented and agreed to reconcile on those terms The Parties did
indeed return to Gilmer County and at first lived in Wacos airport hanger and then the Parties
3The following factual representations are summarized from the July 112012 in-Court testimony of the Petitioner
4
purchased what the Petitioner thought was to be a temporary dwelling in the form of a double wide
modular home
For the next three plus years or into the beginning of2009 the Petitioner and her
two (2) children much to her frustration and embarrassment occupied a domicile that the Petitioner
stated would have fit within the bottom floor ofher former 6700 square feet Roanoke home
The Respondent Husband made various excuses for his failure to fulfill his earlier
promise regarding the erection of a much grander residence and the Petitioners desperation and
irritation with her and the childrens living arrangements brought matters to the point that the
Parties briefly separated for a second time in early 2009 After another reconciliation the
Respondent Husband finally revealed that his procrastination in building the promised home for his
family was that he had to have the fmancial assistance ofhis multimillionaire father to build such a
house and that his father was insisting on a post-nuptial agreement to protect what was anticipated
to be a $75000000 investment
Bowles Rice LLP the corporate attorneys employed by the Respondent Husbands
father were engaged to and did draft the post-nuptial agreement The Wife had the services of a
local Glenville attorney4 Timothy Butcher who was a friend to both Parties herein
Petitioner Wife had alleged and argued from the onset of the underlying action that
said PNA which as stated was prepared at the insistence of the Respondent Husbands father I L
Morris and drafted by corpora~e counsel of the Respondent Husbands father was entered into by
the Petitioner Wife under duress coercion and undue influence
4There is some lingering question whether the Petitioner Wifes counsel was independent where her attorney testified at the July 112012 hearing that he was paid for his representation of the Petitioner Wife by the Respondent Husbands paving his the lawyers residential driveway or by some other in-kind compensation from the Respondent Husband
5
Indeed Petitioners counsel Timothy Butcher testified on the record at the July 11
2012 trial that the Respondent Husband and his fathers attorney definitely held [the PNA-house
connection] over the Petitioner Wifes head in that the Petitioner Wifes attorney was clearly and
directly informed by counsel for the Respondent Husband that if she the Petitioner did not sign the
Post-Nuptial Agreement then the Respondent Husband would not complete construction on the
then pending and now former marital home ie no signature no house 5 See also Appendix p
31
Moreover the Petitioner Wifes attorney advised her not to sign the PNA but out
of an overriding desire to have an acceptable house built for her and her children consistent with her
and the childrens prior standard ofliving the Petitioner Wife signed anyway6 See Appendix p
32 After some negotiation on some minor points (but receiving no corroboration of
listedproperty values- Appendix p 32) and at that time after near~y seventeen (17) years of a
tenuous if not difficult marriage and two (2) children the Parties subscribed to the February 11
2009 Post-Nuptial Agreement (hereafter PNA) See Appendix ppl through 19
Said PNA which was also entered into more than seventeen (17) years after the
February 6 1992 formation ofFlying W Plastics Inc (hereafter Flying W) the ownership
interests ofwhich were representedjor thefirst time on appeal to the Circuit Court below or after
the trial before the Family Court Judge to have been given by the Respondent Husbands wealthy
father to the Respondent Husband and his lawyer sister Shelly Morris Demarino during the
marriage The Respondent Husband and his sister were and are the only shareholders of the closely
SIn-court testimony of attorney Timothy Butcher on July 11 2012 which was corroborated on the same date by the testimony of the Petitioner
6Ibid
6
held corporation which elected to become a Subchapter S or flow through corporation effective
July 120077
The evidence was unrefuted at trial and even confirmed by the Respondent
Husband himself by his own sworn testimony in open Court that he had exercised an active and a
high level of administrative participation on a daily basis in Flying W
Inspecting the document itself the terms of the PNA under scrutiny basically
consigned said Subchapter S Corporation (Flying W) and other marital assets constituting 9811
ofthe marital estate unto the Respondent Husband while the Petitioner Wife took only 189 of
such assets In addition said PNA contained only summary statements of finances by the Parties
ie no full financial disclosure was made due to an absence ofany supporting documentation
attached to the PNA Appendix pp 15 through 18
Also the Respondent Husband greatly understated his projected income for the
PNA year of2009 The Respondent Husband reported on the PNA that his estimated annual
income for 2009 would be $231000 Appendix p 16 In actuality the Parties adjusted gross
income for 2009 was $889862 or almost four (4) times more than the Respondent Husband led the
Wife to believe In comparison to 2008 the year prior to the PNA the Parties earned $1931914
which income as well as the aforesaid 2009 earnings were the products solely of the Respondent
Husbands efforts because the Petitioner Wife did not work during that year of2008 or the
following year of 2009 Compare Appendix p 16 with pp 154 and 158
Ofequal significance the PNA failed to include all marital or arguable marital
assets Several working interests in oil and gas wells across central West Virginia as well as the
7The 2011 gross receipts of Flying W were $4077339400 and $2855606100 in 2010 See Appendix pp 174 and 173 respectively which were Petitioners Exhibits at trial on December 262012
7
very double wide modular home the Petitioner Wife was seeking to leave were not listed in the
PNA attachments
Furthermore the retained earnings8 held by the aforesaid Corporation under the
Parties named account was not mentioned in the PNA Petitioner Wife maintained that even if
the PNA were valid and enforceable the retained earnings were not corporate assets and thus
distributable because the Parties had paid taxes on said earnings before and after the execution of
the PNA The Petitioner Wife also contended that even ifthe PNA were upheld as to the
Corporation those post PNA retained earnings had been commingled with other corporate assets
and monies thus causing a transmutation of the Flying W Corporation or at least its financial
accounts into marital assets
Lastly in the PNA the new house for which the Petitioner Wife gave up so much
was to be lived in by he Petitioner Wife rent free in the event ofa divorce with the Respondent
Husband servicing the mortgage until the Parties sold the marital residence at which time the
Petitioner Wife would receive all proceeds in excess of the mortgage payoff provided however the
Respondent Husband had the right offIrst refusal See Appendix p 8 As something ofamiddot
postscript the Petitioner Wife also testifIed at trial on July 11 2012 that the Respondent Hus1gtand
had failed to honor her whole consideration for signing off on the PNA viz the promised marital
house was never fInished which position the Respondent Husband minimized by saying that only
minor facets of the construction such as landscaping and closet doors remained undone
In essence the Petitioner Wife contended that the terms of said February 11 2009
Post-Nuptial Agreement were unfair and unconscionable to her and that despite having had access
8Retained earnings carried by Flying W in the name ofthe Respondent Husband and his sister for December 2011 were $1185363113 and $1434330786 as of the end ofDecember 2012 See Appendix pp 180 and 181
8
to legal advice coercion in the form ofdenying her and her children the upscale home for which she
had left a stately domicile in Virginia four (4) years past was present and overwhelmed what would
have otherwise been an unacceptable trade offin the context of the PNA Secondarily the
Petitioner Wife posited that even if the PNA were upheld the retained earnings of Flying W in
not being mentioned in the PNA were marital assets upon which the Parties had paid taxes and
thus the same were distributable in the pending divorce action
The Respondent Husband countered that the Petitioner Wife a college graduate
had voluntarily and knowingly entered into the PNA in disregard of the advice of counsel and that
his the Respondent Husbands undocumented financial disclosure was of no serious moment
Regarding the omission of retained earnings in the PNA the Respondent Husband urged that the
same were corporate and not marital assets and the retained earnings were therefore included in the
PNAs release ofFlying W to him
Both Parties agreed that the validity and enforceability of the PNA should first be
determined because the of the impact the Family Courts decision would have on the remaining
issues of the divorce proper Trial on the viability of the PNA commenced on June 22 2012 and
the taking of evidence continued and concluded on July 112012
At the close of the July 11 2012 hearing the Family Court Judge found that the
PNA should be upheld primarily because the Petitioner Wife had freely voluntarily and knowingly
entered into the February 112009 PNA without force or threat however the retained earnings of
Flying W were deemed to be marital assets subject to distribution Appendix p 34
The Final Hearing in the divorce was scheduled for December 26 2012 for the
purpose ofconcluding the case and determining the amount ofthe retained earnings on the January
9
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
purchased what the Petitioner thought was to be a temporary dwelling in the form of a double wide
modular home
For the next three plus years or into the beginning of2009 the Petitioner and her
two (2) children much to her frustration and embarrassment occupied a domicile that the Petitioner
stated would have fit within the bottom floor ofher former 6700 square feet Roanoke home
The Respondent Husband made various excuses for his failure to fulfill his earlier
promise regarding the erection of a much grander residence and the Petitioners desperation and
irritation with her and the childrens living arrangements brought matters to the point that the
Parties briefly separated for a second time in early 2009 After another reconciliation the
Respondent Husband finally revealed that his procrastination in building the promised home for his
family was that he had to have the fmancial assistance ofhis multimillionaire father to build such a
house and that his father was insisting on a post-nuptial agreement to protect what was anticipated
to be a $75000000 investment
Bowles Rice LLP the corporate attorneys employed by the Respondent Husbands
father were engaged to and did draft the post-nuptial agreement The Wife had the services of a
local Glenville attorney4 Timothy Butcher who was a friend to both Parties herein
Petitioner Wife had alleged and argued from the onset of the underlying action that
said PNA which as stated was prepared at the insistence of the Respondent Husbands father I L
Morris and drafted by corpora~e counsel of the Respondent Husbands father was entered into by
the Petitioner Wife under duress coercion and undue influence
4There is some lingering question whether the Petitioner Wifes counsel was independent where her attorney testified at the July 112012 hearing that he was paid for his representation of the Petitioner Wife by the Respondent Husbands paving his the lawyers residential driveway or by some other in-kind compensation from the Respondent Husband
5
Indeed Petitioners counsel Timothy Butcher testified on the record at the July 11
2012 trial that the Respondent Husband and his fathers attorney definitely held [the PNA-house
connection] over the Petitioner Wifes head in that the Petitioner Wifes attorney was clearly and
directly informed by counsel for the Respondent Husband that if she the Petitioner did not sign the
Post-Nuptial Agreement then the Respondent Husband would not complete construction on the
then pending and now former marital home ie no signature no house 5 See also Appendix p
31
Moreover the Petitioner Wifes attorney advised her not to sign the PNA but out
of an overriding desire to have an acceptable house built for her and her children consistent with her
and the childrens prior standard ofliving the Petitioner Wife signed anyway6 See Appendix p
32 After some negotiation on some minor points (but receiving no corroboration of
listedproperty values- Appendix p 32) and at that time after near~y seventeen (17) years of a
tenuous if not difficult marriage and two (2) children the Parties subscribed to the February 11
2009 Post-Nuptial Agreement (hereafter PNA) See Appendix ppl through 19
Said PNA which was also entered into more than seventeen (17) years after the
February 6 1992 formation ofFlying W Plastics Inc (hereafter Flying W) the ownership
interests ofwhich were representedjor thefirst time on appeal to the Circuit Court below or after
the trial before the Family Court Judge to have been given by the Respondent Husbands wealthy
father to the Respondent Husband and his lawyer sister Shelly Morris Demarino during the
marriage The Respondent Husband and his sister were and are the only shareholders of the closely
SIn-court testimony of attorney Timothy Butcher on July 11 2012 which was corroborated on the same date by the testimony of the Petitioner
6Ibid
6
held corporation which elected to become a Subchapter S or flow through corporation effective
July 120077
The evidence was unrefuted at trial and even confirmed by the Respondent
Husband himself by his own sworn testimony in open Court that he had exercised an active and a
high level of administrative participation on a daily basis in Flying W
Inspecting the document itself the terms of the PNA under scrutiny basically
consigned said Subchapter S Corporation (Flying W) and other marital assets constituting 9811
ofthe marital estate unto the Respondent Husband while the Petitioner Wife took only 189 of
such assets In addition said PNA contained only summary statements of finances by the Parties
ie no full financial disclosure was made due to an absence ofany supporting documentation
attached to the PNA Appendix pp 15 through 18
Also the Respondent Husband greatly understated his projected income for the
PNA year of2009 The Respondent Husband reported on the PNA that his estimated annual
income for 2009 would be $231000 Appendix p 16 In actuality the Parties adjusted gross
income for 2009 was $889862 or almost four (4) times more than the Respondent Husband led the
Wife to believe In comparison to 2008 the year prior to the PNA the Parties earned $1931914
which income as well as the aforesaid 2009 earnings were the products solely of the Respondent
Husbands efforts because the Petitioner Wife did not work during that year of2008 or the
following year of 2009 Compare Appendix p 16 with pp 154 and 158
Ofequal significance the PNA failed to include all marital or arguable marital
assets Several working interests in oil and gas wells across central West Virginia as well as the
7The 2011 gross receipts of Flying W were $4077339400 and $2855606100 in 2010 See Appendix pp 174 and 173 respectively which were Petitioners Exhibits at trial on December 262012
7
very double wide modular home the Petitioner Wife was seeking to leave were not listed in the
PNA attachments
Furthermore the retained earnings8 held by the aforesaid Corporation under the
Parties named account was not mentioned in the PNA Petitioner Wife maintained that even if
the PNA were valid and enforceable the retained earnings were not corporate assets and thus
distributable because the Parties had paid taxes on said earnings before and after the execution of
the PNA The Petitioner Wife also contended that even ifthe PNA were upheld as to the
Corporation those post PNA retained earnings had been commingled with other corporate assets
and monies thus causing a transmutation of the Flying W Corporation or at least its financial
accounts into marital assets
Lastly in the PNA the new house for which the Petitioner Wife gave up so much
was to be lived in by he Petitioner Wife rent free in the event ofa divorce with the Respondent
Husband servicing the mortgage until the Parties sold the marital residence at which time the
Petitioner Wife would receive all proceeds in excess of the mortgage payoff provided however the
Respondent Husband had the right offIrst refusal See Appendix p 8 As something ofamiddot
postscript the Petitioner Wife also testifIed at trial on July 11 2012 that the Respondent Hus1gtand
had failed to honor her whole consideration for signing off on the PNA viz the promised marital
house was never fInished which position the Respondent Husband minimized by saying that only
minor facets of the construction such as landscaping and closet doors remained undone
In essence the Petitioner Wife contended that the terms of said February 11 2009
Post-Nuptial Agreement were unfair and unconscionable to her and that despite having had access
8Retained earnings carried by Flying W in the name ofthe Respondent Husband and his sister for December 2011 were $1185363113 and $1434330786 as of the end ofDecember 2012 See Appendix pp 180 and 181
8
to legal advice coercion in the form ofdenying her and her children the upscale home for which she
had left a stately domicile in Virginia four (4) years past was present and overwhelmed what would
have otherwise been an unacceptable trade offin the context of the PNA Secondarily the
Petitioner Wife posited that even if the PNA were upheld the retained earnings of Flying W in
not being mentioned in the PNA were marital assets upon which the Parties had paid taxes and
thus the same were distributable in the pending divorce action
The Respondent Husband countered that the Petitioner Wife a college graduate
had voluntarily and knowingly entered into the PNA in disregard of the advice of counsel and that
his the Respondent Husbands undocumented financial disclosure was of no serious moment
Regarding the omission of retained earnings in the PNA the Respondent Husband urged that the
same were corporate and not marital assets and the retained earnings were therefore included in the
PNAs release ofFlying W to him
Both Parties agreed that the validity and enforceability of the PNA should first be
determined because the of the impact the Family Courts decision would have on the remaining
issues of the divorce proper Trial on the viability of the PNA commenced on June 22 2012 and
the taking of evidence continued and concluded on July 112012
At the close of the July 11 2012 hearing the Family Court Judge found that the
PNA should be upheld primarily because the Petitioner Wife had freely voluntarily and knowingly
entered into the February 112009 PNA without force or threat however the retained earnings of
Flying W were deemed to be marital assets subject to distribution Appendix p 34
The Final Hearing in the divorce was scheduled for December 26 2012 for the
purpose ofconcluding the case and determining the amount ofthe retained earnings on the January
9
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
Indeed Petitioners counsel Timothy Butcher testified on the record at the July 11
2012 trial that the Respondent Husband and his fathers attorney definitely held [the PNA-house
connection] over the Petitioner Wifes head in that the Petitioner Wifes attorney was clearly and
directly informed by counsel for the Respondent Husband that if she the Petitioner did not sign the
Post-Nuptial Agreement then the Respondent Husband would not complete construction on the
then pending and now former marital home ie no signature no house 5 See also Appendix p
31
Moreover the Petitioner Wifes attorney advised her not to sign the PNA but out
of an overriding desire to have an acceptable house built for her and her children consistent with her
and the childrens prior standard ofliving the Petitioner Wife signed anyway6 See Appendix p
32 After some negotiation on some minor points (but receiving no corroboration of
listedproperty values- Appendix p 32) and at that time after near~y seventeen (17) years of a
tenuous if not difficult marriage and two (2) children the Parties subscribed to the February 11
2009 Post-Nuptial Agreement (hereafter PNA) See Appendix ppl through 19
Said PNA which was also entered into more than seventeen (17) years after the
February 6 1992 formation ofFlying W Plastics Inc (hereafter Flying W) the ownership
interests ofwhich were representedjor thefirst time on appeal to the Circuit Court below or after
the trial before the Family Court Judge to have been given by the Respondent Husbands wealthy
father to the Respondent Husband and his lawyer sister Shelly Morris Demarino during the
marriage The Respondent Husband and his sister were and are the only shareholders of the closely
SIn-court testimony of attorney Timothy Butcher on July 11 2012 which was corroborated on the same date by the testimony of the Petitioner
6Ibid
6
held corporation which elected to become a Subchapter S or flow through corporation effective
July 120077
The evidence was unrefuted at trial and even confirmed by the Respondent
Husband himself by his own sworn testimony in open Court that he had exercised an active and a
high level of administrative participation on a daily basis in Flying W
Inspecting the document itself the terms of the PNA under scrutiny basically
consigned said Subchapter S Corporation (Flying W) and other marital assets constituting 9811
ofthe marital estate unto the Respondent Husband while the Petitioner Wife took only 189 of
such assets In addition said PNA contained only summary statements of finances by the Parties
ie no full financial disclosure was made due to an absence ofany supporting documentation
attached to the PNA Appendix pp 15 through 18
Also the Respondent Husband greatly understated his projected income for the
PNA year of2009 The Respondent Husband reported on the PNA that his estimated annual
income for 2009 would be $231000 Appendix p 16 In actuality the Parties adjusted gross
income for 2009 was $889862 or almost four (4) times more than the Respondent Husband led the
Wife to believe In comparison to 2008 the year prior to the PNA the Parties earned $1931914
which income as well as the aforesaid 2009 earnings were the products solely of the Respondent
Husbands efforts because the Petitioner Wife did not work during that year of2008 or the
following year of 2009 Compare Appendix p 16 with pp 154 and 158
Ofequal significance the PNA failed to include all marital or arguable marital
assets Several working interests in oil and gas wells across central West Virginia as well as the
7The 2011 gross receipts of Flying W were $4077339400 and $2855606100 in 2010 See Appendix pp 174 and 173 respectively which were Petitioners Exhibits at trial on December 262012
7
very double wide modular home the Petitioner Wife was seeking to leave were not listed in the
PNA attachments
Furthermore the retained earnings8 held by the aforesaid Corporation under the
Parties named account was not mentioned in the PNA Petitioner Wife maintained that even if
the PNA were valid and enforceable the retained earnings were not corporate assets and thus
distributable because the Parties had paid taxes on said earnings before and after the execution of
the PNA The Petitioner Wife also contended that even ifthe PNA were upheld as to the
Corporation those post PNA retained earnings had been commingled with other corporate assets
and monies thus causing a transmutation of the Flying W Corporation or at least its financial
accounts into marital assets
Lastly in the PNA the new house for which the Petitioner Wife gave up so much
was to be lived in by he Petitioner Wife rent free in the event ofa divorce with the Respondent
Husband servicing the mortgage until the Parties sold the marital residence at which time the
Petitioner Wife would receive all proceeds in excess of the mortgage payoff provided however the
Respondent Husband had the right offIrst refusal See Appendix p 8 As something ofamiddot
postscript the Petitioner Wife also testifIed at trial on July 11 2012 that the Respondent Hus1gtand
had failed to honor her whole consideration for signing off on the PNA viz the promised marital
house was never fInished which position the Respondent Husband minimized by saying that only
minor facets of the construction such as landscaping and closet doors remained undone
In essence the Petitioner Wife contended that the terms of said February 11 2009
Post-Nuptial Agreement were unfair and unconscionable to her and that despite having had access
8Retained earnings carried by Flying W in the name ofthe Respondent Husband and his sister for December 2011 were $1185363113 and $1434330786 as of the end ofDecember 2012 See Appendix pp 180 and 181
8
to legal advice coercion in the form ofdenying her and her children the upscale home for which she
had left a stately domicile in Virginia four (4) years past was present and overwhelmed what would
have otherwise been an unacceptable trade offin the context of the PNA Secondarily the
Petitioner Wife posited that even if the PNA were upheld the retained earnings of Flying W in
not being mentioned in the PNA were marital assets upon which the Parties had paid taxes and
thus the same were distributable in the pending divorce action
The Respondent Husband countered that the Petitioner Wife a college graduate
had voluntarily and knowingly entered into the PNA in disregard of the advice of counsel and that
his the Respondent Husbands undocumented financial disclosure was of no serious moment
Regarding the omission of retained earnings in the PNA the Respondent Husband urged that the
same were corporate and not marital assets and the retained earnings were therefore included in the
PNAs release ofFlying W to him
Both Parties agreed that the validity and enforceability of the PNA should first be
determined because the of the impact the Family Courts decision would have on the remaining
issues of the divorce proper Trial on the viability of the PNA commenced on June 22 2012 and
the taking of evidence continued and concluded on July 112012
At the close of the July 11 2012 hearing the Family Court Judge found that the
PNA should be upheld primarily because the Petitioner Wife had freely voluntarily and knowingly
entered into the February 112009 PNA without force or threat however the retained earnings of
Flying W were deemed to be marital assets subject to distribution Appendix p 34
The Final Hearing in the divorce was scheduled for December 26 2012 for the
purpose ofconcluding the case and determining the amount ofthe retained earnings on the January
9
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
held corporation which elected to become a Subchapter S or flow through corporation effective
July 120077
The evidence was unrefuted at trial and even confirmed by the Respondent
Husband himself by his own sworn testimony in open Court that he had exercised an active and a
high level of administrative participation on a daily basis in Flying W
Inspecting the document itself the terms of the PNA under scrutiny basically
consigned said Subchapter S Corporation (Flying W) and other marital assets constituting 9811
ofthe marital estate unto the Respondent Husband while the Petitioner Wife took only 189 of
such assets In addition said PNA contained only summary statements of finances by the Parties
ie no full financial disclosure was made due to an absence ofany supporting documentation
attached to the PNA Appendix pp 15 through 18
Also the Respondent Husband greatly understated his projected income for the
PNA year of2009 The Respondent Husband reported on the PNA that his estimated annual
income for 2009 would be $231000 Appendix p 16 In actuality the Parties adjusted gross
income for 2009 was $889862 or almost four (4) times more than the Respondent Husband led the
Wife to believe In comparison to 2008 the year prior to the PNA the Parties earned $1931914
which income as well as the aforesaid 2009 earnings were the products solely of the Respondent
Husbands efforts because the Petitioner Wife did not work during that year of2008 or the
following year of 2009 Compare Appendix p 16 with pp 154 and 158
Ofequal significance the PNA failed to include all marital or arguable marital
assets Several working interests in oil and gas wells across central West Virginia as well as the
7The 2011 gross receipts of Flying W were $4077339400 and $2855606100 in 2010 See Appendix pp 174 and 173 respectively which were Petitioners Exhibits at trial on December 262012
7
very double wide modular home the Petitioner Wife was seeking to leave were not listed in the
PNA attachments
Furthermore the retained earnings8 held by the aforesaid Corporation under the
Parties named account was not mentioned in the PNA Petitioner Wife maintained that even if
the PNA were valid and enforceable the retained earnings were not corporate assets and thus
distributable because the Parties had paid taxes on said earnings before and after the execution of
the PNA The Petitioner Wife also contended that even ifthe PNA were upheld as to the
Corporation those post PNA retained earnings had been commingled with other corporate assets
and monies thus causing a transmutation of the Flying W Corporation or at least its financial
accounts into marital assets
Lastly in the PNA the new house for which the Petitioner Wife gave up so much
was to be lived in by he Petitioner Wife rent free in the event ofa divorce with the Respondent
Husband servicing the mortgage until the Parties sold the marital residence at which time the
Petitioner Wife would receive all proceeds in excess of the mortgage payoff provided however the
Respondent Husband had the right offIrst refusal See Appendix p 8 As something ofamiddot
postscript the Petitioner Wife also testifIed at trial on July 11 2012 that the Respondent Hus1gtand
had failed to honor her whole consideration for signing off on the PNA viz the promised marital
house was never fInished which position the Respondent Husband minimized by saying that only
minor facets of the construction such as landscaping and closet doors remained undone
In essence the Petitioner Wife contended that the terms of said February 11 2009
Post-Nuptial Agreement were unfair and unconscionable to her and that despite having had access
8Retained earnings carried by Flying W in the name ofthe Respondent Husband and his sister for December 2011 were $1185363113 and $1434330786 as of the end ofDecember 2012 See Appendix pp 180 and 181
8
to legal advice coercion in the form ofdenying her and her children the upscale home for which she
had left a stately domicile in Virginia four (4) years past was present and overwhelmed what would
have otherwise been an unacceptable trade offin the context of the PNA Secondarily the
Petitioner Wife posited that even if the PNA were upheld the retained earnings of Flying W in
not being mentioned in the PNA were marital assets upon which the Parties had paid taxes and
thus the same were distributable in the pending divorce action
The Respondent Husband countered that the Petitioner Wife a college graduate
had voluntarily and knowingly entered into the PNA in disregard of the advice of counsel and that
his the Respondent Husbands undocumented financial disclosure was of no serious moment
Regarding the omission of retained earnings in the PNA the Respondent Husband urged that the
same were corporate and not marital assets and the retained earnings were therefore included in the
PNAs release ofFlying W to him
Both Parties agreed that the validity and enforceability of the PNA should first be
determined because the of the impact the Family Courts decision would have on the remaining
issues of the divorce proper Trial on the viability of the PNA commenced on June 22 2012 and
the taking of evidence continued and concluded on July 112012
At the close of the July 11 2012 hearing the Family Court Judge found that the
PNA should be upheld primarily because the Petitioner Wife had freely voluntarily and knowingly
entered into the February 112009 PNA without force or threat however the retained earnings of
Flying W were deemed to be marital assets subject to distribution Appendix p 34
The Final Hearing in the divorce was scheduled for December 26 2012 for the
purpose ofconcluding the case and determining the amount ofthe retained earnings on the January
9
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
very double wide modular home the Petitioner Wife was seeking to leave were not listed in the
PNA attachments
Furthermore the retained earnings8 held by the aforesaid Corporation under the
Parties named account was not mentioned in the PNA Petitioner Wife maintained that even if
the PNA were valid and enforceable the retained earnings were not corporate assets and thus
distributable because the Parties had paid taxes on said earnings before and after the execution of
the PNA The Petitioner Wife also contended that even ifthe PNA were upheld as to the
Corporation those post PNA retained earnings had been commingled with other corporate assets
and monies thus causing a transmutation of the Flying W Corporation or at least its financial
accounts into marital assets
Lastly in the PNA the new house for which the Petitioner Wife gave up so much
was to be lived in by he Petitioner Wife rent free in the event ofa divorce with the Respondent
Husband servicing the mortgage until the Parties sold the marital residence at which time the
Petitioner Wife would receive all proceeds in excess of the mortgage payoff provided however the
Respondent Husband had the right offIrst refusal See Appendix p 8 As something ofamiddot
postscript the Petitioner Wife also testifIed at trial on July 11 2012 that the Respondent Hus1gtand
had failed to honor her whole consideration for signing off on the PNA viz the promised marital
house was never fInished which position the Respondent Husband minimized by saying that only
minor facets of the construction such as landscaping and closet doors remained undone
In essence the Petitioner Wife contended that the terms of said February 11 2009
Post-Nuptial Agreement were unfair and unconscionable to her and that despite having had access
8Retained earnings carried by Flying W in the name ofthe Respondent Husband and his sister for December 2011 were $1185363113 and $1434330786 as of the end ofDecember 2012 See Appendix pp 180 and 181
8
to legal advice coercion in the form ofdenying her and her children the upscale home for which she
had left a stately domicile in Virginia four (4) years past was present and overwhelmed what would
have otherwise been an unacceptable trade offin the context of the PNA Secondarily the
Petitioner Wife posited that even if the PNA were upheld the retained earnings of Flying W in
not being mentioned in the PNA were marital assets upon which the Parties had paid taxes and
thus the same were distributable in the pending divorce action
The Respondent Husband countered that the Petitioner Wife a college graduate
had voluntarily and knowingly entered into the PNA in disregard of the advice of counsel and that
his the Respondent Husbands undocumented financial disclosure was of no serious moment
Regarding the omission of retained earnings in the PNA the Respondent Husband urged that the
same were corporate and not marital assets and the retained earnings were therefore included in the
PNAs release ofFlying W to him
Both Parties agreed that the validity and enforceability of the PNA should first be
determined because the of the impact the Family Courts decision would have on the remaining
issues of the divorce proper Trial on the viability of the PNA commenced on June 22 2012 and
the taking of evidence continued and concluded on July 112012
At the close of the July 11 2012 hearing the Family Court Judge found that the
PNA should be upheld primarily because the Petitioner Wife had freely voluntarily and knowingly
entered into the February 112009 PNA without force or threat however the retained earnings of
Flying W were deemed to be marital assets subject to distribution Appendix p 34
The Final Hearing in the divorce was scheduled for December 26 2012 for the
purpose ofconcluding the case and determining the amount ofthe retained earnings on the January
9
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
to legal advice coercion in the form ofdenying her and her children the upscale home for which she
had left a stately domicile in Virginia four (4) years past was present and overwhelmed what would
have otherwise been an unacceptable trade offin the context of the PNA Secondarily the
Petitioner Wife posited that even if the PNA were upheld the retained earnings of Flying W in
not being mentioned in the PNA were marital assets upon which the Parties had paid taxes and
thus the same were distributable in the pending divorce action
The Respondent Husband countered that the Petitioner Wife a college graduate
had voluntarily and knowingly entered into the PNA in disregard of the advice of counsel and that
his the Respondent Husbands undocumented financial disclosure was of no serious moment
Regarding the omission of retained earnings in the PNA the Respondent Husband urged that the
same were corporate and not marital assets and the retained earnings were therefore included in the
PNAs release ofFlying W to him
Both Parties agreed that the validity and enforceability of the PNA should first be
determined because the of the impact the Family Courts decision would have on the remaining
issues of the divorce proper Trial on the viability of the PNA commenced on June 22 2012 and
the taking of evidence continued and concluded on July 112012
At the close of the July 11 2012 hearing the Family Court Judge found that the
PNA should be upheld primarily because the Petitioner Wife had freely voluntarily and knowingly
entered into the February 112009 PNA without force or threat however the retained earnings of
Flying W were deemed to be marital assets subject to distribution Appendix p 34
The Final Hearing in the divorce was scheduled for December 26 2012 for the
purpose ofconcluding the case and determining the amount ofthe retained earnings on the January
9
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
72012 separation date and the method for distribution thereof At the conclusion of the evidence
the Family Court Judge for the purposes of this appeal divorced the Parties and ruled that his
former decision as to the validity and enforceabilty of the PNA would be reversed on the grounds of
being inequitable when one considered other marital assets not covered by the PNA Appendix p
41
Pursuant to West Virginia Code sect48-8-103 the Family Court Judge next awarded
lump sum alimony to the Petitioner Wife in the form of one-half (Y2) of all of the Respondent
Husbands interest in Flying W being 25 ofthe common stock of said Corporation See
Appendix p 45 Moreover the Family Court Judge ordered that the Petitioner Wife was entitled to
one-half(Y2) of the retained earnings account attributable to the Respondent Husband as of the
January 72012 separation date Appendix p 45
Interestingly on the day after the Family Court Judges pronounced opinion or
December 272012 but before the February 19 2013 entry of the conforming Final Divorce
-Decree the Respondent Husband moved to and did execute and comply with every part of the
December 262012 ruling save the apportionment of the retained earnings account See Appendix
pp 37- 49 When the Family Court Judge upon the Petitioner Wifes objection to the retained
earnings omission in the Respondent Husbands draft of the Final Divorce Decree made the
Paragraph N interlineation in the Final Divorce Decree respecting the same only then did the
Respondent Husband decide that he wanted to appeal the entire December 26 2012 ruling of the
Family Court Judge entered February 19 2013 Appendix pp 50 - 93
The Respondent Husband filed his Petition for Appeal and Motion for Stay on
March 202013 See Appendix pp 50 - 93 The Petitioner Wife lodged her Reply and her
10
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
Counter-Petition for Appeal on March 272013 See Appendix pp 94 - 119 Respondent
Husband in turn responded to the Petitioner Wifes Cross-Petition on April 9 2013 to which
Petitioner Wife replied on April 22 2013 See Appendix pp 120 - 135 and Appendix pp 136shy
141 respectively
Argument was had on the Parties appeals on May 282013 Through his Order of
July 152013 the Circuit Court of Gilmer County the Honorable Richard Facemire presiding
completely reversed the Family Courts February 192013 decision on all points and granted the
aforesaid appeal by the Respondent Husband Appendix pp 144-151
Hence this appeal is made to overturn the July 152013 decision of the Circuit
Court below and reinstate in its entirety the February 19 2013 ruling of the Family Court of Gilmer
County below
SUMMARY OF ARGUMENT
Post-nuptial agreements require the closest scrutiny in order to insure fairness and
to guard against even subtle much less overt coercion Weighty considerations of children health
age and standards ofliving as well as heavy investments of time sweat and youth may cause a
marriage partner to enter into an onerous and one-sided post-nuptial agreement which elements are
not present in pre-nuptial contracts
Any post-nuptial agreement that consigns to a husband 9811 or $466273800
ofthe entire marital estate $475273800 while giving the wife of a nineteen (19) year marriage
only 189 ofsaid marital estate or $9000000 is presumptively unfair and inequitable and is
invalid and unenforceable on its face When one adds to the mix of facts here the undisguised and
stark extortion of the Petitioner Wifes signature to such an agreement in order for her to have a
home on the comfort level ofher previous domicile and as fulfillment of an enticement to reconcile
11
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
from a fonner separation the undue influence becomes as obvious as the inequity The coercion
and undue influence is not any less real because the Petitioner Wife may have had the services ofan
attorney Quite the contrary acquiescence in a clearly prejudicial and gender biased post-nuptial
agreement over the objection ofher attorney underscores the degree of the coercion in its
acquisition
Retained earnings in a flow through corporation were taxed to these Parties each
year after the 2007 Sub S election Even after the advent of the nefarious February 11 2009
PNA the Parties not the Flying W corporation paid taxes on those retained earnings and the
accounts were carried in the name of the shareholders The retained earnings of the Corporation
were not used for corporate purposes but rather a stock buy-out of a fonner shareholders widow
the taxes personal expenses and interests of the individual shareholders ie the Respondent
Husband and his sister In short the retained earnings had consistently been available to and
unilaterally accessed by the Respondent Husband despite his only being a 50 owner in the
Corporation Therefore irrespective ofthe validity of the PNA the retained earnings as delayed
distributions of income in the Flying W are not corporate assets but rather marital assets subject
to distribution
STATEMENT REGARDING ORAL ARGUMENT AND DECISION
Petitioner urges that oral argument would significantly aid the decisional process
under Rule 18(a)(4) WVRRAP In addition this matter should be set for a Rule 20(a) argument
because this case involves issues of first impression with statewide application or importance that
are likely to recur with respect to the drafting and adoption of post-nuptial as opposed to preshy
nuptial agreements and separation agreements in general which are appearing with increasing
frequency in West Virginia domestic relations actions West Virginia Code sect48-7-102 Moreover
12
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
as marriages become more affluent and include either marital corporations or separately owned
corporations with a marital component by virtue of active appreciation the divorce question of
whether retained earnings in a flow through corporate entity are corporate property or marital
assets subject to distribution should be addressed not only in order to give guidance to family
courts judges in this State but also to assist practitioners in advising and aiding clients similarly
situated The predictability function of the law expects it justice to disadvantaged marriage
partners demands it
ARGUMENT
I INA DWORCEACTIONA STRICTER STANDARD MUST BE EMPLOYED IN WEIGHING THE VALIDITYAND ENFORCEABILTY OFA POST-NUPTIAL AGREEMENT AS OPPOSED TO A PRE-NUPTIAL AGREEMENT
The Circuit Court below erred by not assessing the validity and enforceabilty of a post-nuptial agreement with greater scrutiny than a pre-nuptial agreement
Pre-nuptial and post-nuptial agreements are first and foremost contracts Thus
the rules ofcontract fonnation apply to pre-nuptial and post-nuptial agreements Lee v Lee 228
WVa 483721 SE2d 53 (WVa 2011) Basically there must be valid consideration on both sides
of the bargain to be a valid contract See generally Restatement (Second) ofContracts sect 71 Next
one must inspect the tenns of a contract in order to ascertain validity Where the tenns of a contract
are substantially unequal the disadvantaged spouse may be able to establish the defense of
unfairness or unconscionability Id Any ambiguities or shortcomings in a contract should be
construed against the Party who drafted the docmnent Lee supra
Descending to specifics a post-nuptial is an agreement between lawful spouses
who intend to continue their marriage that alters or confirms their legal rights that would otherwise
arise under the divorce law of the controlling jurisdiction American Law Institute Principles athe
Law aMarital Dissolution sect701(1)(b)(2002)
13
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
This Court has held that dower may be barred by a post-nuptial marriage contract
but the intent of the parties to bar dower must clearly appear from the language of the contract or be
necessarily implied Welsh v Welsh 136 WVa 914 69 SE2d 34 (1952) Further when dealing
with post-nuptial contracts the utmost fairness and good faith should be observed by the
husband and the consideration moving to the wife should be of such value as reasonably to
compensate her for what she agreed to surrender and such an agreement must be in writing and
must be entirely free from doubt Id at 921
A post-nuptial agreement stands on a different footing from both a premarital and
a separation agreement Ansin v Craven-Ansin 457 Mass 283 289 929 NE2d 955962
(2010) An agreement in anticipation ofmarriage is vastly different from a situation where a spouse
is trying to save a long term marriage to which she has committed her best years Id at 290 and
962
Moreover a post-nuptial agreement must be given closer scrutiny than a preshy
nuptiaI agreement for the simple reason that in the case ofa pre-nuptial a party can still walk away
from the contemplated marriage Before marriage the parties have greater freedom to reject an
unsatisfactory premarital contract Ansin at 289 and 962 This is radically unlike the situation
where the party to the post-nuptial agreement is already in the marriage and may have a number of
other considerations such as children standard of living advanced age or waning health thus the
opportunity for and the threat of latent or patent coercion in the subscription thereto is much greater
In re Marriage oTraster 291 P3d 494 (Kan App 2012) In brief [c]ourts must recognize that
parties to a marriage are not dealing at arms length Casto v Casto 508 So2d 330 334 (Fla
1987)
The State of Connecticut explains that standards of fairness and notions of equity
14
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
are an ongoing process not frozen in time Although we agree with the defendant that principles
of contract law generally apply in determining the enforceability of a post-nuptial agreement we
conclude that post-nuptial agreements are subject to a special scrutiny and the terms of such
agreements must be both fair and equitable at the time ofthe execution and not unconscionable
at the timeofthe dissolution Bedrick v Bedrick 300 Conn 691 696-697 17 A3d 1723
(2011) (Emphasis supplied) Accord Pacelli v Pacelli 319 NJ Super 185 190-196725 A2d
56 (1999)
In the case below the Circuit Court of Gilmer County employed the same degree
of review applied the same rules and cited the same authorities that it would have utilized had it
been evaluating the validity of a pre-nuptial contract not a post-nuptial agreement as presented
here thereby committing error See Appendix pp 146-147 Paragraphs Nos 11 12 and 13
n A POST-NUPTIAL CONTRACT DRAFTED BY THE HUSBANDS ATTORNEY CANNOT BE UPHELD THAT (A) CONSIGNED A VASTLY DISPROPORTIONATE PERCENTAGE OF MARITAL ASSETS TO THE HUSBAND (B) DID NOTATTACH DOCUMENTATION CONFIRMING THE EXTENTAND VALUES OF PROPERTY (C) DID NOT INCLUDEALL MARITAL ASSETS AND (D) SEVERELY UNDERSTATED THE HUSBANDS ANTICIPATED ANNUAL INCOME
The Circuit Court below erred in overturning the Family Courts ruling finding that the February 112009 Post-Nuptial Agreement was unfair and inequitable
The Respondent Husband below bore the burden of proof on an appeal to the
Circuit Court of Gilmer County in that all presumptions are in favor of the correctness of the
proceedings and judgment by the Family Court below Perdue v Coiner 156 WVa 467 194
SE2d 657 (1973)
In addition the Circuit Court below in relation to the validity equity and
enforceability ofFebruary 11 2009 PNA should have given due deference to the Family Courts
findings of fact and conclusions oflaw or the application of the facts to the law if the Family Court
15
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
did not violate one of the established standards of review Stephen LH v Sherry LB 195 WVa
384465 SE2d 841 (1995)
Also the Circuit Court below as an immediate appellate court for family court
decisions cannot substitute its judgment for the Family Court and the Family Courts findings and
inferences may not be overturned even if the Circuit Court below may have been inclined to make
different fmdings or draw contrary inferences Protan v Ghannam 2011 LEXIS 121
(Memorandum Decision 2011) and Rosen v Rosen 222 WVa 402 664 SE2d 743 (2008)
A hallowed tenet in this States case law is that the standards of review of a final
order from a family court in this application must be shown to have been clearly erroneous andor
an abuse ofdiscretion Carr v Hancock 216 WVa 474 607 SE2d 803 (2004)
In the case sub judice the Respondent Husbandfor the first time on anpeal to the
Circuit Court referred to the Flying W as being separate property by virtue of being a gift from
his father 1 1 Morris Appendix pp 55 and 57
If Flying W Plastics Inc or the constituent shares thereof were not marital
property as erroneously alleged by the Respondent Husband in his April 9 2013 Reply herein then
why did he and his attorneys deem the Petitioner Wifes signature on the February 112009 Postshy
Nuptial Agreement to be necessary in the first place Moreover considering the litany of corporate
aspects and assets attempted to be covered by the recitations of the February 11 2009 PNA why
were retained earnings not mentioned at any place therein if the Respondent Husband deemed them
a corporate asset
Flying W Plastics Inc was incorporated just four (4) months before (2692) the
Parties marriage (63092) however even if said Corporation or its shares at corporate birth were
separate the Respondent Husband by his own testimonial admission and as confirmed by Eric
16
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
Brown (the CPA and comptroller for Flying W) at trial had exercised a high level of
administrative participation on a daily basis therefore giving rise to the active appreciation
concept ofequitable distribution
This principle stands for the proposition that although an asset may be separate in
its initial form appreciation in its value during the marriage may be wholly marital if certain
circwnstances have occurred See Mayhew v Mayhew (Mayhew II) 205 WVa 490 519 SE2d
188 (1999) This was certainly the case below- all appreciation of the Corporation was during the
marriage and at least a partial result of the Respondent Husbands efforts and involvement
Therefore active appreciation is distributable Id
Again assuming for arguments sake that Flying W or its stock attributed to the
Respondent Husband was separate property from the inception of the subject Corporation then the
same became marital when the retained earnings taxed to the Parties were commingled with other
corporate earnings or shareholder dividends and such commingling caused a transmutation of
separate property into marital property Miller v Miller 189 WVa 126428 SE2d 547 (1993)
and Mayhew v Mayhew (Mayhew I) 197 WVa 290 475 SE2d 382 (1996)
Be that academic exercise as it may Respondent Husband had the burden ofproof
to demonstrate that Flying W or its stock claimed by the Respondent Husband was not marital
Mayhew I supra For some unexplained reason the Respondent Husband did not undertake this
burden at trial and the same should now be deemed as having been waived In essence the
Respondent Husband cannot raise the issue of the separate classification by gift ofFlying W
Plastics Inc or its stock for the first time on appeal Mayhew II supra
With respect to validity equity and enforceability of the PNA there are certain
17
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
stipulated or unrefuted facts from the Family Court proceedings below appearing in the Appendix
pp 15 - 19 pp 28 - 36 p 43 and pp 154 158 and 162 to-wit
1 That the subject PNA was entered into by the Parties on February 112009
2 That the PNA was prepared at the insistence of the Respondent Husbands
father1 1 Morris and the same was drafted by legal counsel for the Respondent Husbands said
father
3 That the PNA was entered into nearly seventeen (17) years after the Parties
were married and the Parties circumstances have changed for the worse in the four (4) years since
said PNA was executed
4 That pursuant to the terms of the PNA the Respondent Husband would receive
$466273800 worth of alleged separate property while the Petitioner Wife would receive a mere
$9000000 worth of alleged separate property and if said PNA were to control the equitable
distribution of the assets herein the Respondent Husband is left with property valued at overfifty
(50) times the amount left to the Petitioner Wife
5 That reduced to comparative quantitative terms under the PNA the total
marital estate of $475273800 would have generated the following inequitable result the
Respondent Husband would have received 9811 of the entire marital estate while the Petitioner
Wife would have acquired only 189 of said marital estate
6 That said PNA does not include all of the Parties actual or potential assets9
9 The property listings did not include Respondent Husbands oil and gas working interests royalties holdings or leaseholds nor did they list a modular home a trust set up from his retained earnings account at Flying W stock holdings in another family corporation investments all insurance policies or various higher value items of personalty such as
18
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
and the Respondent Husband did not provide a full fmancial disclosure prior to the execution of
said PNA ie that in addition to not including all arguably marital or separate assets the
Respondent Husband attached no documentation to the PNA to substantiate the summary fmancial
and asset statements attached thereto as exhibits and
7 That the Respondent Husband grossly under-reported his income in that the
Respondent Husband represents in the post-nuptial agreement that his estimated annual income for
2009 would be $231000 In actuality the Parties adjusted gross income for 2009 was $889862
In 2008 the year prior to the PNA the Parties earned $1931914 and in 2010 the year after the
PNA the Parties reported adjusted gross income of $1 070202 which income for all three (3) years
was the product solely of the Respondent Husbands efforts because the Petitioner Wife did not
work during that year of 2008 or the following years of 2009 and 2010
One may then conclude on these admitted or unchallenged facts that the
Respondent Husband misled ~e Petitioner Wife as to the total effect of the PNA as well as what
his annual income was and what the value of the martial property was at the time of the PNA
Of greatest significance to this case the said PNA was according to the July 11
2012 in-Court testimony of Petitioner Wifes counsel held over the [Petitioner Wifes] head in
that the Petitioner Wife was informed by Respondent Husbands counsel through her attorney that
if she did not sign the PNA then the Respondent Husband would riot complete construction on the
now former marital home ie no signature no house Appendix p 31
Moreover the Petitioner Wifes attorney had advised her not to sign the PNA but
which out ofdesire to have a house built for her and her children consistent with her and the
recreational and other vehicles See in part and for example Appendix pp 291 and 305
19
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
childrens prior standard of living in Virginia the Petitioner Wife signed anyway Appendix pp 33
and 57
The Circuit Court erred below by viewing the presence of an attorney in the PNA
transaction as the metaphorical detergent washing away of all sins of coercion undue influence or
duress and apparently as a question of law the Circuit Court below found the fact of the Petitioner
Wifes being represented by counsel as being dispositive ofall claims of coercion in overruling the
Family Court and upholding the PNA See Paragraphs 14 and 15 of the Circuit Courts July 15
2013 Order appealed hereby appearing in the Appendix at p 147
Surely this Court cannot imagine or even conceive of a more coercive measure
than to withhold suitable habitation to a spouse and her children unless her signature appeared on a
compromising and property related document Also th~ mere presence of an attorney in negotiation
of a post-nuptial and his or her unheeded advice to refrain from its execution does not equal fair
and equitable or negate unconscionability in the referenced document nor does it relieve the trial
court of the obligation to pass on the presence offraud duress or unconscionable conduct or
enforceability and equitable considerations in any marital agreements West Virginia Code sect48-7shy
102 In essence coercion is not any less real because one may have the services ofan attorney
In this connection compare the case of Casto supra10 The parties there were
married for a second time in 1967 The wife never worked outside the home During the last
marriage the husband had made a fortune in developing shopping centers In 1977 the parties
entered into a post-nuptial agreement whereby the wife took the marital home with mortgage paid
for one year $10000000 in cash health insurance benefits club memberships and credit card
1deg508 So2d 330 (Fla 1987)
20
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
privileges and whereby the husband took everything else which was later estimated at trial to be
valued at $10000000 Each party also waived claims for alimony and attorney fees
The husband in Casto filed for a divorce in 1978 and sought to enforce the postshy
nuptial while the wife contested the same based on claims of duress and over-reaching by the
husband
There were other factual features in Casto very similar to the case at bar The wife
had prepared a written addendum to the post-nuptial ofher understanding ofher husbands holdings
and she did admit to a general knowledge of their assets The husband was represented by counsel
during the negotiations and the wife had two attorneys the first who advised her not to sign the
post-nuptial and a second lawyer who did The evidence also revealed that the husband had told
the wife after the first attorney advised her not to sign the post-nuptial that she would get another
attome)( to approve the post-nuptial agreement or he would see to it that she would lose the marital
home and all the furnishings therein and that he would burn down the marital home The wifes
second attorney was not well versed in domestic relations and inspected the post-nuptial agreement
as to whether it was in proper form only Id at 335
The Casto domestic relations trial judge had ruled that the husbands disclosure
was insufficient that the post-nuptial agreement was unfair and inequitable and that the conduct of
the husband had negated the legal advice she had initially received not to sign the agreement all of
which nullified the post-nuptial contract Recognizing that parties to a marriage do not deal at arms
length in arriving at marital agreements the Casto appellate court affirmed the trial court in all
particulars as articulated in that lower courts opinion set forth above Id at 334 and 335
Other collateral but relevant evidence before the Gilmer County Family Court
21
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
below that the marital home remained unfinished as of the trial date See footnote No3 above
The affirmative defense of failure ofconsideration asserted by the Petitioner Wife in her
pleadings carried more than passing weight
Worthy also of some consideration the Respondent Husband had already
presumptively accepted and acted upon said December 26 2012 Final Divorce Decree entered
February 192013 by the issuance of445 shares of stock to the Petitioner Wife pursuant to the
Courts pronounced ruling of December 26 2012 which terms were not contained within a written
Order until February 192013 or nearly two (2) months later Appendix pp 53 and 118 Ifthe
Parties have acted consistent with the Family Court Judges Order and conveyed property then the
Parties have reformed and modified the PNA by their conduct and apparent agreement on the terms
of the Family Court Judges December 262012 Final Order which they obviously accepted
Compare Teed v Teed No 12-0232 (WVa filed May 172013) (Memorandum Decision)
Based on the foregoing there can be no other conclusion that the terms of the
February 11 2009 Post-Nuptial Agreement are and were unfair and unconscionable to the Petitioner
Wife and the same was entered into by the Petitioner Wife under duress coercion and undue
influence
ID RETAINED EARNINGS OFA FLOW THROUGH CORPORATION UPON WHICH THE PARTIES TO A MARRIAGE PAID INCOME TAXES ARE DISTRIBUTABLE MARITAL ASSETS AND NOTASSETS OF THE CORPORATION
The Circuit Court below erred as a matter of law when it overruled the Family Court and classified retained earnings of the flow through Corporation as corporate assets controlled by the 2009 Post-Nuptial Agreement notwithstanding that the shareholder Husband and Wife had paid income taxes on the retained earnings and the shareholder Husband had taken additional non-payroll and third party draws from the Corporation both before and after the execution of the Post-Nuptial Agreement
22
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
All property and earnings acquired by either spouse during a marriage is presumed
marital West Virginia Code sect48-1-233 Since case law construes the aforecited statute as
expressing a marked legislative preference for characterizing the property of spouses as marital
property the burden of proof is on the spouse party who asserts the non-distributable separate
property classification in a divorce action Loudermilk v Loudermilk 183 WVa 616 397 SE2d
905 (1990)
Ifthe February 112009 PNA is upheld in its separate property consignments it is
limited to the property covered by its terms The February 11 2009 PNA did not mention the
Respondent Husbands retained earnings account at Flying W
Irrespective of the validity of the PNA the Family Court below found on July 11
2012 and again on December 262012 that the retained earnings of Flying W Plastics Inc were
to be marital properties because the Parties had paid taxes on said earnings over several years during
the marriage This was purely an equitable distribution issue and NOT an alimony issue See
Appendix p 34 being the August 72012 Order Page 7 last paragraph and p 45 being the Final
Divorce Decree Page 9 Paragraph 10 n) respectively
For the Family Court to have denied or to have failed to award the Petitioner Wife
one-half (Yl) ofthe retained earnings would have rendered the Family Courts lump sum alimony
award meaningless or moot when one considers the two (2) letters from Marc Monteleone Esq
attorney for Flying W Plastics Inc attached to the Petitioner Wifes March 272013 Response to
Respondent Husbands Petition for Appeal (to the Circuit Court below) Appendix pp 111 - 118
These missives indicate or clearly imply that the Petitioner Wife would not receive one penny from
the hostile Respondent Husband and his sister who owns the remaining shares of the subject
company absent a sale ofFlying W Ibid This is the reality of the corporate attitude that would
23
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
defeat the Family Court Judges ruling in this regard
There are also legal as well as equitable reasons for awarding the Petitioner Wife
her ratable share of the Parties retained earnings accumulated through and taxed to them over a
number ofyears during the marriage To make Petitioner Wifes shares equal to the shares that the
Respondent Husband retains she must have one-half (~) of the retained earnings account as well
Without such an award the Petitioner Wife does not have a position equal to the Respondent
Husband Simply put her position as a minority shareholder is less than equal Moreover the
Respondent Husband would receive a windfall of Petitioner Wifes one-half (~) ofthe retained
earnings which is accentuated if the Respondent Husband would choose to pay dividends from the
retained earnings in the future
To be clear the Petitioner Wife does not maintain that there mustbe an immediate
cashpayout to her from the retained earnings but she merely contends that she should share ratably
in the account entitlements much as one would have a bank account subject to withdrawal
restrictions
What precisely are retained earnings for the purposes of this discussion Retained
earnings are not true assets of the corporation such as a corporate purchase of an automobile in its
name Said monies upon which the Parties were already taxed actually represent undisbursed
dividends or income or they can be said to be re-contributions ofthe Parties to the capital ofthe
corporation Concisely stated the corporate earnings are taxed to the Parties but some of the
Parties after tax earnings are left in the corporation to be withdrawn at a later time or to insure
adequate capitalization as if the monies had been withdrawn and then redeposited
Moreover retained earnings sometimes referred to as Accumulated Adjustments
Account (hereafter AAA) represent the whole of the shareholders undistributed but already taxed
24
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
net earnings which can be numerically determined by multiplying the AAA by the shareholders
percentage of stock ownership
Retained earnings are similar to a bank savings account with respect to
entitlements and approved withdrawals therefrom which are determined by the shareholders This
Court should not accept the Respondent Husbands argument below and anticipated position here
that retained earnings accounts are like treasury stock of the subject Corporation and thus
corporate assets The glaringly apparent reason for rejection of such a position is simple- the
Parties hereto DID NOT pay income taxes on any treasury stock or any other common corporate
assets such as automobiles equipment inventory land or condominiums owned by middotthe
Corporation
This Court should not overlook the functioning form of the subject Corporation
which supports the Petitioner Wifes position to-wit Flying W Plastics Inc was at separation a
qualified Sub S or a flow through corporation This means that the profitsll ofthe Corporation
flow through to the shareholders as if they were partners in that the only taxes on those
profitsincome are those paid by the shareholders not the Corporation Essentially the tax planning
attraction is that the same income for Sub SOl corporations is not taxed twice once at the corporate
level and once at the dividend or salary level Thus the Respondent Husband cannot have it both
ways- retained earnings undisbursed dividends or profits that are income to him only for tax
purposes but corporate assets that cannot be reached for equitable distribution purposes
Petitioner Wife would advance another very compelling point in favor of the
11 A short definition is that retained earnings are that portion of residue profits not paid out as dividends or retained in a corporation Blacks Law Dictionary (Abridged 5th Edition 1990) Another brief definition is that an AAA is the summation of undistributed after tax earnings
25
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
marital classification of retained earnings Had the Respondent Husband sold ~ of his 50 of his
corporate shares to a stranger at any time after the corporate issue of stock and certainly after the
Sub S election that portion of the retained earnings corresponding to the amount of the third party
stock sale or 25 in our example would have gone with the purchase and the purchaser
Petitioner Wife further argues that after the Family Court Judges February 19
2013 Final Divorce Decree the Respondent Husbands then retained earnings account was
configured in an amount as if he owned 50 of the Flying W Plastics Inc stock which of
course was then not the case When argued in any proceeding below Respondent Husband did not
deny it
Authority for the classification of retained earnings within a divorce context is
sparse but not non-existent In the only case in West Virginia that even mentions retained earnings
this Court appeared to equate distributable active appreciation with retained earnings accounts so
that both are not counted in equitable distribution computations See Smith v Smith 197 WVa
505475 SE2d 881 (1996) footnote 11 Thus one could conclude that this Court in Smith (had it
decided the issue) believed that retained earnings in a corporation were distributable in marital
dissolution actions
This Court however should note with approval and be fully persuaded by the
authority from other jurisdictions that the retained earnings in the subject Corporation to the extent
of the Respondent Husbands holdings on the date of separation are wholly marital and subject to
distribution regardless ofany decision reached herein regarding the enforceability of the February
11 2009 PNA
Although West Virginia has not squarely decided the question of the maritallnonshy
26
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
marital nature of retained earnings within a divorce context aside from the Smith footnote
mentioned above other jurisdictions have addressed this issue For example
(i) Ramon v Ramon 963 A2d 128 (Del 2008) which held that
retained earnings in marital companies are marital properties for distribution to the wife because 1)
husband had the burden of proof of showing such assets were not marital and 2) husband had the
power to distribute funds from the retained earnings In Ramon the husband argued as the
Respondent Husband did below in the case sub judice that the family court did not have
jurisdiction over the third party corporation where the retained earnings were on deposit The
Appellate Court disagreed stating that since the retained earnings were deemed marital the Court
did not need jurisdiction over the company when it had jurisdiction of the parties and the divorce
subject matter Id at 135
(ii) In re Marriage ofLundahl 919 NE2d 480 (Ill App 2009) determined that
the husbands retained earnings were marital because he was the sole shareholder and he alone
possessed the ability to distribute funds from the retained earnings (which he did every year) and
that the retained income was the husbands actual income from the business which was merely
delayed in its realization Lundahl is readily contrasted with the Illinois domestic relations appeal
In re Marriage ofJoynt 375 Ill App 3d 817 874 NE2d 916 (Ill App 2007) cited by the
Respondent Husband below in which Midwest case retained earnings were deemed non-marital
solely for the reason that the husband was only 33 shareholder and did not have the power to
solely distribute income from the retained earnings account
In the case at bar the Respondent Husband and his sister each having 50 ofthe
subject stock have undiluted control over the distributions of retained earnings income and the
27
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
testimony below indicated that they had done so on an frequent basis since Flying W Plastics
Inc had been incorporated which will be more fully discussed infra
In addition to Joynt the Respondent Husband sought solace below in the dated
rulings of other jurisdictions that hold retained earnings to be non-marital This dependence is
misplaced especially his heavy reliance upon the case ofIn re Casten 819 NW2d 426 (Iowa
App 2012) The dispute in Casten hinged on the fact that husband was 1) only a minority (less
than 50) shareholder 2) that he did not have the authority to distribute retained earnings and 3)
that he did not conspire with others to minimize distributions from retained earnings
(iii) Heineman v Heineman 768 SW2d 130 (Mo App WD 1989) similarly
deemed wifes retained earnings in her studio business to be marital on the grounds that she did not
take a salary during the marriage for tax purposes and-that she was the sole proprietor and that the
retained earnings actually represented the income she did not take
(iv) Zaccardelli v Zaccardelli 2013 Ohio 1878 (Ohio App No 26262 2013) is
the most nearly factually identical recent (2013) and simplistically influential case supporting
Petitioner Wifes position herein
In Zaccardelli the wife and husband were married in 2000 after executing a preshy
nuptial agreement that the husbands pre-marital interest (50 with his brother having 50) in his
family business Blue Line Design Inc a Subchapter s corporation (hereafter Blue) including
any increase in value would remain the husbands separate property Subsequent to the wedding
the wife quit her job as a teacher two years later to raise two children born in 2002 and 2004
respectively Wife filed for divorce in 2010 and the case proceeded to trial on December 162011
The parties did not contest the validity of the pre-nuptial but they disagreed on its
28
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
application to the retained earnings in Blue and the former marital residence The trial court
determined that Y2 of the retained earnings accumulated during the parties marriage was
undisbursed income attributable to husband as a 50 shareholder in Blue and therefore 50 of the
retained earnings was distributable as marital property in the divorce case Id at p 2
The husband appealed claiming (a) that the parties pre-nuptial contract barred
wifes recovery of any portion of the Blue corporation-held retained earnings account because the
retained earnings were specified in the asset statement attached to the pre-nuptial and (b) that the
retained earnings account was a Blue corporate asset anyway and ( c) that he had no unilateral
access to Blues retained earnings account without the consent of his brother the other 50 owner
ofBlue Id at pp3-7
Rejecting the husbands contentions in Zaccardelli the Ohio Appeals Court
affirmed the domestic relations trial court and held that as in the case at bar the classification of
the retained earnings as marital did not affect the husbands separate ownership ofBlue and the
increase in value of the corporation under the valid and enforceable pre-nuptial agreement- it just
did not cover the retained earnings This disposed of the husbands first argument Id at p 5
Also the Ohio appellate court in addressing the last two points of the husbands
claim together stated that the analysis of whether the retained earnings were marital undistributed
income to the husband despite his having only 50 would turn on his accessibility to the retained
earnings ofBlue Id at p 6
In reviewing the evidentiary record the Zaccardelli court found that from the
shareholders retained earnings account Blue had purchased two (2) vehicles for the husbands use
paid the husbarid and wifes property taxes and made contributions to the pairs health savings
29
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
account [d at p 7 The fact that the husband in Zaccardelli had claimed as income the monies
paid by Blue from the retained earnings account for the property taxes and health savings account
contributions seemed to clinch the issue for the court in favor of a marital property classification of
the retained earnings account [d
The similarities ofZaccardelli to the case at bar are as striking as they are
obvious The Respondent Husband below is a co-majority shareholder with his sister Shelly
DeMarino and 2) if the Respondent Husband herein and his sister do not have the power to
distribute retained earnings who does
Also after 2007 when the subject Corporation elected Sub-Chapter S status the
Respondent Husband and his sister were the only shareholders in the subject corporation owning
equal share percentages therein and according to Eric Brown the corporate accountant and
comptroller various payments were made at times from their respective retained earnings accounts
for and on behalf of the Respondent Husband Therefore Respondent Husband could never be
considered a minority shareholder in the said Corporation mainly due to the established fact that
he did have and did exercise equal authority with his sister to distribute funds in the past from his
retained earnings account See Respondent Husbands July 22012 Financial Disclosure below at
Appendix pp 183 - 330
As in Ramon and Zaccardelli the Respondent Husband here cannot seriously
argue that as a 50 shareholder he is a minority shareholder when he and his sister the other
50 shareholder have had a history of taking draws from the retained earnings accounts for
personal taxes debts and acquisitions which evidence before the Family Court was provided by
their own company accountant Eric Brown See Appendix p 182 being the July 1 2007 through
June 22 2012 recapitulation or summary of Respondent Husbands draw expenditures from his
30
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
equity account in Flying W designated as Petitioner Wifes Exhibit 9 tendered at the July 11
2012 Family Court hearing Also see Appendix pp 183 - 330 being the Respondent Husbands
July 22012 Financial Disclosure which confIrmed the individual draws by the Respondent
Husband that are summarized on the Appendix p 182 aforesaid
SpecifIcally this Court should remark that over a number of years including 2010
through 2012 the Respondent Husband took draws designated as non-payroll owner and $000
tax draws from Flying W not only for payment of taxes12 but also for undesignated purposes at
irregular intervals in amounts ranging from $500000 to $3000000 in 2011 alone none of which
apparently required the other 50 shareholders permission or cooperation Appendix pp 200shy
212
According to Eric Brown the Corporations accountant the Respondent Husband
and his sister also utilized the retained earnings account to complete over a four (4) year period the
post Sub S election buy-out ($58652227) of the widow of a deceased fonner shareholder one
Kenny Greenlief who held a 10 interest in Flying W at the time of his death on September 26
2006 (which was just a few months before the said July 12007 Sub S election)
The single most significant fact to be noted from the variety of the Respondent
Husbands draws from his equity AAA or retained earnings accounts is that said draws including
the Greenlief buy-out were for personal13 rather than corporate purposes ie the Flying W
Corporation received or derived no fInancial benefit no purchases no maintenance from the monies
12See Appendix pp 188224229230 and 213 - 269
13See Appendix p 192 (two [2] house payments) Appendix p 194 (landscaping) Appendix pp 271 - 330 (electrical work on the Morris home to personal vehicle maintenance and repair to gifts to Respondent Husbands father to water fixtures for his residence to funding ofpersonal trusts to purchasing personal vehicles or paying offloans for personal vehicles)
31
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
in these retained earnings accounts-they were historically used enjoyed and consumed by the two
equity shareholders for whollvpersonalpurposes See Appendix pages set forth in footnotes 12
and 13 hereinbefore
Succinctlywhether the Respondent Husbands retained earnings in Flying W are
characterized as dividends or undistributed income they are still income and as set out above in
vast detail the Respondent Husband treated the retained earnings account at Flying W as his own
personal banking account drawing and unilaterally accessing the monies available in such amounts
and when and for whatever purposes as he pleased Ifthe Respondent Husband herein claimed the
retained earnings as income and paid taxes on that income why should this Court regard or treat it
any differently in a divorce case Ifthe retained earnings account was corporate in nature would
one be able to point to any monies thatwere spent form the retained earnings for the good ofthe
Corporation The subject Corporation herein did not benefit from one dime ofthe retained
earnings The apparent answer then is the same to both questions the retained earnings of
Respondent Husbands account at Flying W which he historically claimed as income is a
distributable marital asset and not a corporate asset
These facts alone (the Respondent Husbands unilateral and unrestricted access to
his AAA together with his tax treatment ofpayment on the retained earnings) should render his
retained earnings account marital rather than corporate property Thus the erroneous legal
conclusions made on July 152013 by the Circuit Court below in holding the Respondent
Husbands corporate retained earnings to be a corporate asset are successfully underscored and
exposed Appendix pp 148 149 and 150
Finally the Respondent Husband cannot seriously contend that the Petitioner Wife
herein would have no interest in any dividends or undistributed income disbursed in the future from
32
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
the retained earnings account that the Parties paid taxes on and which existed during the marriage
See West Virginia Code sect48-7 -104 Therefore how can the Respondent Husband argue below that
the Petitioner Wife would have no distributable marital interest in the retained earnings account that
generated those future dividends
All of the foregoing factors should indicate the plain error of the Circuit Court
below in concluding within Paragraphs 17242526 and 28 that the retained earnings account
of the Respondent Husband were not marital assets but rather corporate assets that were controlled
by the ill-conceived February 112009 PNA Appendix pp 148 149 and 150
CONCLUSION
TIDS Honorable Court should deem this appeal timely perfected that the same be
promptly accepted properly docketed and duly considered that upon the facts stated the errors and
omissions complained of the arguments made the reasons given the authority cited and oral
presentation ifpermitted the July 15 2013 Order ofthe Circuit Court of Gilmer County the
intermediate appellate trial court below granting the Respondent Husbands Petition for Appeal to
the Circuit Court of Gilmer County and thereby reversing the February 19 2013 Final Divorce
Decree of the Family Court of Gilmer County should be REVERSED set aside and held for
naught
AND that the same be REMANDED with instructions to reinstate said February
19 20l3Final Divorce Decree of the Family Court of Gilmer County
AND that Petitioner be granted such other and further relief as this Court may
deem equitable proper and just and in the premises meet she will ever pray etc
33
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
KIMBERLEY A MORRIS Petitioner
145 Main Street Sutton West Virginia 26601 Counsel for Petitioner
34
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
VERIFICATION
STATE OF WEST VIRGINIA
COUNTY OF BRAXTON TO-WIT
KIM MORRIS the ~ Pe_titimiddotoner named in the foregoing
Attached Pleadings after being duly sworn says that the facts and allegations
therein contained are true except so far as they are therein stated to be on
information and belief and that so far as they are therein stated to be on
information and belief she believes them to be true
-gtL--+-yen~L4----- 20 (3 by KIM MORRIS
Taken sworn to and subscribed before me this the30~day of
A r
My Commission Expires IVtJ~L Rlt I ~ dcQ I bull
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013
CERTIFICATE OF SERVICE
I JAMES WILSON DOUGLAS the undersigned attorney do hereby certify that
a true copy ofthe foregoing Petitioners Brief was deposited in the regular United States mail in
an envelope properly stamped and addressed to Anita Harold Ashley Post Office Box 823
Spencer West Virginia 25276 on this 30th day ofAugust 2013